The company's recent situation

The company recently announced that it plans to acquire 100% of Kakizhuyuan's shares through cash payments and issuance of shares, and plans to raise funds to promote Kakizhuyuan's technical improvement project, pay cash consideration, and supplement working capital. We believe that the integration of the company's tungsten industry chain is expected to accelerate and will have a significant positive impact on the company's profits.

reviews

Persimmon Bamboo Garden has outstanding resource advantages, and its tungsten resource reserves and production rank among the highest in the world. According to the company's announcement, in terms of reserves, in terms of metallicity, Persimmon Zhuyuan has 560,000 tons of tungsten resources, accounting for more than 30% of China's tungsten resource reserves, ranking first in the world in terms of reserves that can be exploited industrially. In terms of production scale, Persimmon Zhuyuan ore mining scale is 3.5 million tons/year, with an annual output of tungsten concentrate exceeding 7,000 tons, accounting for 6% of China's total production and 4% of total global production; Persimmon Zhuyuan has an annual production capacity of 15,000 and 11,000 tons of ammonium paratungstate and tungsten oxide, with an output of 13051 and 8183 tons in 2023, which is remarkable; Persimmon Zhuyuan has an annual production capacity of over 300,000 tons of fluorite, ranking among the highest in China. In addition, Kakizhuyuan also sells products such as molybdenum concentrate and bismuth concentrate.

Chinatungsten Hi-Tech plans to purchase shares in Kakizhuyuan through the issuance of shares and cash payment, and raise funds to promote technical reform projects. First, in the restructuring plan, the main payment method is to issue shares. The company plans to purchase 100% of Kakizhuyuan's shares, with a transaction consideration of 5.19 billion yuan, of which 4.79 billion yuan will be paid in consideration by issuing shares and 400 million yuan in cash. Second, in terms of the fund-raising plan, the company plans to raise no more than 1.8 billion yuan by issuing shares.

Of this, 800 million yuan was used for the Persimmon Zhuyuan 10,000 t/d mining technology improvement project to change the mining method from underground mining to mining, and expand the beneficiation scale from 6,500 t/d to 10,000 t/d, of which 400 to 600 million yuan was used to pay cash consideration and supplement working capital. Furthermore, the company expects that after the restructuring, the shareholding ratio of Minmetals, the controlling shareholder of the company, and those involved will rise from 49.89% to 65.55% without considering raising supporting capital.

Resource integration has begun, combined with the strengthening of tungsten prices, and the company's integration capacity and profit level are expected to increase significantly.

First, this injection plan starts the process of integrating the company's resources. China Minmetals has previously promised to inject tungsten mines and tungsten smelters into listed companies after meeting the injection conditions. In addition to Kakizhuyuan, the company currently hosts companies such as Xianglushan, Yuanjing Tungsten, Xintianling, and Yaogangxian. We believe the company has the potential to further inject into the mine. Second, after completing the injection of Kakizhuyuan, the company is expected to enjoy the benefits of rising tungsten prices. Against the backdrop of tightening tungsten resources and stricter policies in China, the price of tungsten concentrate in China was 149,000 yuan/ton as of June 18, 2024, with a cumulative increase of 22% for the whole year. Third, after this transaction is completed, the company's profit level may reach a new level. According to the company's announcement, the company expects net profit (exam preparation) to be 839 million yuan in 2023 after the transaction is completed, an increase of 73% over the original 485 million yuan. Affected by the promotion of technical improvement projects and the adjustment of mining methods, the company expects that the net profit of Kakizhuyuan mining rights will achieve a net profit of 3.4/2.6/1.4/180 million yuan in 2024-2027, and the company expects the net profit of Kakizhuyuan mining rights to recover in 2027.

Profit forecasting and valuation

We keep our profit and valuation unchanged. The current stock price corresponds to 2024-25 P/E 28/26x. Maintaining an industry performance and target price of 11.5 yuan, corresponding to 2024-25 P/E 32/30x, with room for 16% increase.

risks

The injection process of the Kakizhuyuan project fell short of expectations; the price of tungsten concentrate fell sharply; downstream demand fell short of expectations.