Chinatungsten Hi-Tech released its three-quarter report: Q3 achieved revenue of 3.422 billion yuan (yoy +13.99%, qoq -10.89%) and net profit of 59.194 million yuan (yoy -19.35%, qoq -28.78%). Q1-Q3 2024 achieved revenue of 10.229 billion yuan (yoy +7.13%), net profit of 0.206 billion yuan (yoy -34.66%), deducting non-net profit of 0.174 billion yuan (yoy -26.65%). The company's revenue maintained year-on-year growth in the third quarter, and the decline in profit was mainly due to an increase in raw material prices. Considering the company's leading position in the tungsten industry, it is expected to benefit from the recovery of the domestic manufacturing industry and maintain “purchases” in the future.

Revenue bucked the year-on-year trend, and rising raw materials put pressure on profitability

Domestic PMIs from July to September were 49.4, 49.1, and 49.8, respectively. Facing weak terminal demand and the continuous contraction of the hard alloy market, the company withstood market pressure, increased professional marketing efforts, and achieved year-on-year revenue growth. The company achieved a gross profit margin of 14.8% and a net profit margin of 2.4% in a single quarter, -1.2 and -0.8 pct, respectively. The decline in gross margin was mainly affected by a combination of factors such as increased competition in the industry and rising costs of raw and auxiliary materials. On the one hand, the share of sales of low- and middle-end tools increased; on the other hand, the average price of domestic tungsten carbide powder was +12.5% in 24Q3, putting pressure on the gross margin of tungsten products such as blades.

Focus on lean and strictly control period expenses

The company's expenses were +5.2% year-on-year during the first three quarters, which was less than the revenue growth rate. Q3 Sales/management/R&D/finance cost rates for a single quarter were +0.3/-0.6/-0.2/-0.1 pct, respectively. The sales expense ratio increased. The main reason was that companies increased their efforts to promote professional trial production, which led to an increase in advertising and business promotion expenses. The decline in the management expense ratio is mainly due to a year-on-year decrease in equity incentives. The company's overall R&D expenses in the first three quarters were 0.413 billion yuan, +19% year-on-year, and continued to increase investment in new product research projects. The company's overall financial expenses in the first three quarters were +76% year-on-year, mainly due to changes in the RMB exchange rate, which led to a year-on-year decrease of 0.031 billion yuan in exchange earnings.

Profit forecasting and valuation

Since the price of tungsten carbide rose more than expected during the year and affected the company's profitability, the profit forecast was slightly lowered. The net profit forecast for 24-26 was 0.4, 0.56, 0.61 billion yuan (down 9%, 5%, and 1% from the previous value), corresponding to PE 32, 23, and 21 times. Compared to the 25-year Wind, the average PE value was 35 times, giving the company a 25-year 35 times PE valuation, and the corresponding target price was 14 yuan (previous value 9.6 yuan).

Risk warning: 1) The reform progress of state-owned enterprises falls short of expectations; 2) the degree of product overlap of domestic enterprises has increased; 3) downstream demand continues to be sluggish.