1H24 results fall short of our expectations

The company announced 1H24 results: revenue/net profit to mother of 2.52/0.18 billion yuan, +1.0%/-15.7% YoY.

Due to export pressure, the company's tool and mold steel business is recovering slowly, and the performance is lower than our expectations.

1) Product sales increased significantly: 1H24's sales volume of various types of steel continued to grow rapidly, and sales volume of high-speed steel/die steel/cutting tools/titanium alloy increased 19.2%/7.8%/26.6%/14.4% year-on-year to 0.008 million tons/0.071 million tons/0.12 billion pieces/0.003 million tons. 2) Profit differentiation of main products: high speed steel/die steel:

Due to the high cost of raw materials combined with fierce market price competition, high speed steel ton price/gross profit ratio was -4.2%/-23.2% to 5,3613/7559 yuan, and mold steel ton price/gross profit ratio was -4.3%/-22.4% to 16,535/2199 yuan. Cutting tools: The recovery in demand for overseas DIY products and large-scale renewal of domestic cutting tools supported gross profit of +10.1% to 1.3 yuan/piece compared to the same period. Titanium alloy: Due to the restructuring of downstream ordered products, the tonnage price/gross profit ratio was -27.1%/-8.8% to 139,786/54517 yuan. 3) The year-on-year decline in other earnings affected profit: the decline in exchange earnings of 1H24 companies led to other revenue of -0.054 billion yuan year-on-year. 4) Capital expenditure decreased, and cash flow performance was steady: 1H24's operating cash flow was 0.15 billion yuan, which was basically the same as the previous year; as early projects were put into operation one after another, capital expenditure decreased by 35% to 0.118 billion yuan over the same period last year.

Development trends

High-end titanium materials continue to be released, and market competitiveness is expected to continue to improve. 1H24's EB furnace was successfully put into operation, and the construction of a high-end titanium project with an annual output of 3,000 tons continued to advance. The product structure was improved and the price of titanium sponge as a raw material weakened, driving steady growth in the gross margin of titanium products. The gross profit margin of 1H24 titanium alloy business was +7.8ppt to 39.0% year-on-year. The company is actively exploring application scenarios for titanium in the consumer electronics/aerospace/medical fields. Currently, titanium is rapidly penetrating in many downstream application fields. We believe that the company, as a leading civilian titanium alloy leader, is expected to seize development opportunities and open up new profit growth poles.

The overseas strategy continues to advance, becoming a global high-end material supplier and service provider. 1) Breakthroughs in overseas customer development: 1H24 continues to promote various certifications for overseas die-casting molds. Titanium for 3D printing has been recognized by many well-known overseas customers, all of which have entered the early supply stage. We believe this marks an important breakthrough in high-end titanium and die-casting molds. We are optimistic that the company's profit will be accompanied by a steady increase in the volume of titanium and die-casting molds. 2) Laying out overseas smelting bases: The construction of Thailand's 0.03 million-ton special steel project is progressing steadily, and we expect it to be put into operation in 25. We believe that the expansion of overseas production capacity will further help the company avoid the risk of trade frictions, enhance the company's ability to serve high-end overseas customers, and help the company move towards a global high-end materials supplier and service provider.

Profit forecasting and valuation

Due to the decline in gross profit per ton of products, we lowered our 24/25e net profit of 43.5%/43.6% to 0.36/0.48 billion yuan. The current stock price corresponds to 12x/9x P/E. Currently, the sector's valuation is low, and titanium products have high growth potential. We are optimistic that the company's mid-term profit valuation will double repair to keep the company's performance rating and target price unchanged at 2.51 yuan, corresponding to 24/25e 17x/12x P/E, implying 44.3% upward space.

risks

Prices of alloy raw materials have risen sharply, and the global economy is declining at an accelerated pace.