Investment logic:
Why are you optimistic about wear-resistant spare parts: large space+consumables attributes+low upward cycle+large domestic market space: According to the company's 2023 announcement, the company's mining wear-resistant spare parts products are estimated to have global industry revenue of around 40 billion yuan per year. Wear-resistant spare parts belong to the mining machinery aftermarket. Nearly 80% of Weir Group (LON: WEIR)'s revenue in the past 3 years came from the aftermarket, and the aftermarket has become the main source of revenue for overseas mining machinery leaders.
It has consumable properties to achieve growth through the cycle: Wear-resistant spare parts have strong consumable properties. Weir Group's aftermarket revenue grew at a compound rate of more than 7% from 2011 to 2023, and achieved steady growth through the cycle along with the increase in the installed capacity of mining machinery.
It is currently in a booming upward cycle: Currently, global mining machinery is in an upward cycle, and the domestic mining machinery industry continues to rise. Maintaining high levels of copper and gold as the main downstream prices for mining machinery is expected to stimulate the industry's prosperity to continue to rise.
Domestic brand share is low: The wear-resistant spare parts industry has high entry barriers, and overseas leaders such as Metso Group (HLSE: METSO), Weir Group, and AIA (BSE: 532683) account for most of the market. Domestic wear-resistant spare parts companies' related business revenue is generally less than 1 billion yuan, and there is plenty of room for growth in the future.
Why are we optimistic that the company can achieve a breakthrough: Resonance between the material side and the client side creates new opportunities Material side opportunities: According to the company's 2024 announcement, the current replacement rate for rubber wear-resistant spare parts in the mineral processing process is about 10%. In the context of continuous large-scale mills, the economy of rubber materials continues to improve, which is expected to drive replacement. Meanwhile, the company focused on research and development of materials such as rubber and forged high-alloy wear-resistant steel for many years, and developed metal-rubber composite products earlier, building differentiated competitive advantages, and using new material opportunities to achieve breakthroughs with major customers such as Meiyi Electric Steel and CITIC Heavy Industries. Currently, the company continues to expand into new fields such as special ceramic materials, and new materials are expected to continue to create new opportunities.
Client opportunities: Foreign investment in China's mining industry is growing rapidly, driving supporting opportunities for domestic mining machinery companies. The company's core customers, Zijin Mining and Jiangxi Copper, are actively allocating global resources. The company is expected to continue to benefit from the increase in the share of Chinese mining machinery brought about by Chinese mining companies going overseas.
Investment advice
The company is expected to achieve net profit of 1.55/ 221/296 million yuan from 24 to 26, corresponding to the current PE26X/18X/14X. Considering that the company's rubber wear-resistant spare parts business has good growth prospects and strong profitability, the company's performance is expected to achieve high growth. The company will be given 25 times PE in 25 years, corresponding to a target price of 36.07 yuan/share, giving the first coverage a “buy” rating.
Risk warning
The increase in the penetration rate of new materials fell short of expectations, downstream capital expenditure fell short of expectations, overseas expansion of Chinese mining companies fell short of expectations, and the balance of convertible bonds was large.