Leading tungsten industry, perfect industrial chain layout. Chinatungsten Hi-Tech is a platform enterprise under the Minmetals Group specializing in the development of the tungsten industry. It manages and operates a complete tungsten industry chain integrating mining, smelting, processing and trade. The company's tungsten concentrate, APT, hard alloy, CNC blade and PCB micro drill production capacity are at the forefront of the industry. The technical barriers for CNC blades and PCB micro drills are relatively high, and the gross margin is high, maintaining more than 30% over a long period of time. The subsidiaries Zhuzhou Diamond (which produces CNC blades) and Jinzhou Precision (which produces PCB micro drills) are highly profitable, contributing the most to the company's overall profit.

Tungsten ore: Expectations for the injection of tungsten ore hosted by the company have increased, and the profit contribution is flexible. According to the “Proposal on Changing the “Industrial Chain Integration” Commitment by the Company's Actual Controller to Change the “Industrial Chain Integration” Commitment” reviewed and approved by the 8th Board of Directors of the Company on April 18, 2017, the commitment of a listed company to inject tungsten ore controlled by Minmetals Group into Minmetals Group meets the requirements for two consecutive years to start the injection process within one year from the date the non-net profit withholding is positive for two consecutive years and meets the listing conditions. As supply tightened, tungsten prices fluctuated at a high level of around 0.12 million yuan/ton. Profit support for tungsten ore was strong, and tungsten ore injection expectations increased. The company hosts large reserves of tungsten ore resources, and the annual output is maintained at around 0.025 million tons. Kakizhuyuan injection was initiated in January 2024. According to estimates, we expect Kakizhuyuan to contribute 0.535 billion yuan in '24. If subsequent injections of other tungsten ores are considered, the forward profit contribution is expected to increase further.

Cutting tools: CNC blade and PCB micro drill two-wheel drive, consolidating the basic profit base. The growth in the scale of the CNC blade industry has benefited from the increase in the CNC conversion rate of machine tools and the logic of domestic replacement. As a leading domestic CNC blade, the company is positioned in the middle and high-end, and production capacity is steadily expanding.

PCB micro drills are a key tool for processing PCB microholes. The scale of the industry follows the steady growth in PCB output value. The subsidiary Jinzhou Precision has the largest market share in the world and has outstanding technical and product advantages. In 2022, PCB micro drills produced 0.575 billion, with a global market share of more than 20%.

The combined revenue of Zhu Dian and Jinzhou Precision Industries accounted for 21% of total revenue, but the profit contribution reached 75% (the equity ratio has been taken into account).

Tungsten wire: The penetration rate of photovoltaic tungsten wire can be expected to increase, and it is expected that incremental profits will be realized. Photovoltaic tungsten wire has a large space for thinning, is feasible and economical to replace high-carbon steel wire, and is expected to accelerate penetration. The company's new 10-billion-meter photovoltaic tungsten wire production capacity has been gradually put into operation, which is expected to become a new growth point for performance. According to estimates, production is expected to bring a profit increase of 0.059 billion yuan.

Profit forecast and valuation: As the leader in the tungsten industry chain, CNC blades and PCB micro drill two-wheel drive basic systems are growing steadily. Without considering the 2024 Kakizhuyuan injection, we forecast that the company's net profit to the mother in 2023-2025 will be 0.468/0.547/0.581 billion yuan, respectively, corresponding to the closing price of April 3, 2024, PE is valued at 35/30/28x. Considering the increase in profits brought about by future asset injections in tungsten mines and the continuous increase in added value brought about by the industrial upgrading of downstream deep-processing products, the profits brought about by CNC blades and PCB micro drills being in a leading position in the industry have a certain moat. For the first time, they have been covered, giving them an “increase in weight” rating.

Risk warning: risk of demand fluctuations; risk of project construction falling short of expectations; risk of new business development falling short of expectations; risk of asset injection falling short of expectations.