occurrences

The company announced on October 29 that it achieved revenue (5.509 billion yuan, -1.83%), net profit to mother (0.517 billion yuan, -5.97%), gross profit margin (21.45%, -1.03pcts), and net profit margin (10.78%, -0.84pcts) in the first three quarters of 2024. 24Q3 achieved revenue (1.778 billion yuan, -6.51% YoY, -6.57%), net profit to mother (0.114 billion yuan, -32.64% YoY, -53.38%), gross profit margin (19.47%, YoY -2.75pcts, -7.47pcts), net profit margin (7.87%, YoY -2.94 pcts, -7.05pcts month-on-month). Synonymous with “Chinese titanium,” the titanium supplier company for major aerospace projects is the largest titanium and titanium alloy production and research base in China. It has an internationally advanced and complete titanium production system, and the annual output of the leading product, titanium, ranks among the highest among similar enterprises in the world. The company's military products are widely used in aviation (engine blades, protective plates, ribs, wings, landing gear, etc.), aerospace (cabin frames, rocket engine shells, body fuel engine combustion chambers, docking parts, engine booms, etc.), ships (ship hydrofoils, walkers, etc.). Civilian products are mainly used in petrochemical, metallurgical, seawater desalination, medical, and other living fields such as eyeglass frames, kitchen utensils, clubs, etc., and in construction fields such as roofs and railings. The company has been awarded as an excellent supplier by China Aerospace Science and Technology Corporation for three consecutive years. It is also a strategic partner of companies such as Boeing of the United States, Airbus of France, Snecma of France, Goodrich of the United States, Bombardier of Canada, and Rolls-Royce of the United Kingdom.

Production and sales of titanium products increased steadily, and profit declined due to changes in the product structure. The company's revenue (5.509 billion yuan, -1.83%) declined slightly in the first three quarters of 2024. During this period, the company's production and sales volume of titanium products reached 0.0257 million tons (+6.40%) and 26,400 tons (+8.96%) respectively, both of which increased compared to the same period last year. Therefore, we believe that the decline in the company's revenue was mainly affected by the decline in the price of titanium products.

Meanwhile, the company's net profit (0.517 billion yuan, -5.97%) declined, mainly due to a year-on-year decrease in sales revenue and a decrease in gross margin due to changes in product structure. The gross profit margin (21.45%, -1.03pcts) declined, while the decline in net profit margin (10.78%, -0.84pcts) narrowed.

R&D expenses have declined, and inventories have remained at a high level

The company's expense ratio (7.08%, -0.42pcts) declined slightly in the first three quarters of 2024, mainly affected by the decline in R&D expenses rate (2.55%, -0.80pcts). There was a slight increase in the three-fee rate (4.53%, +0.38pcts), mainly due to an increase in the sales expense ratio (0.86%, +0.14pcts) and the management fee ratio (3.20%, +0.30pcts). The slight decrease in the financial expense ratio (0.47%, -0.06pcts) was mainly due to a decrease in interest expenses.

The company's accounts receivable for the first three quarters of 2024 were $3.909 billion, an increase of 36.47% over the end of 2023. The centralized settlement method at the end of the year will lead to an increase in the company's annual revenue. The company's inventory for the first three quarters of 2024 was 3.628 billion yuan. Although it decreased slightly from the end of 2023 (-2.00%), it is still at a high level. Combined with the company's production model based on sales, we think the company is in high demand. Adjust fund-raising projects to increase capacity building for titanium alloy 3D printing to fill gaps in the company's business area. The company implemented private targeted additional distribution projects in 2021, mainly investing in high-quality titanium production lines, aerospace grade titanium alloy product production lines, testing and inspection centers, and scientific research pilot platform construction projects. Among them, high-end titanium projects will gradually be put into operation, and the company's titanium product structure will continue to be optimized. However, based on comprehensive consideration of resource restrictions such as the company's region, talent reserves, research universities, etc., and factors such as large gaps with central cities in terms of talent introduction and project cooperation, the company announced plans to adjust the “scientific research pilot platform” of the “testing, inspection center and scientific research pilot platform construction project” to a “titanium alloy 3D printing pilot production line construction project” in June 2024. The project plans to invest 56.572 million yuan, and the construction period is 18 months. After completion, 126.25 tons/year of titanium and titanium alloy spherical powder will be added, and the production capacity of titanium alloy, superalloy and stainless steel 3D printing products will be 22.8 tons/year. The company's capacity building in the field of 3D printing will further improve the company's industrial chain layout and fill the company's gaps in this field.

The price of titanium sponge continues to fall, reducing the pressure on the cost side of enterprises

Since 2023, the price of titanium sponge, a raw material for titanium alloys, has continued to decline. As of October 29, 2024, the price of titanium sponge (TI: 99.7%) had fallen to 0.047 million yuan/ton, down nearly 50% from the June 2022 high (0.093 million yuan/ton), and the cost pressure on titanium alloy companies has decreased markedly.

Demand in the high-end titanium market has increased, and military technology and civilian use have opened a “second growth curve”. The high-end titanium market has benefited from the impact of upgrading and localization in aerospace and other fields. Demand is strong, and the level of related technology is becoming more and more mature. Under the trend of upgrading and iterating new materials and new processes, the shift of military technology to the civilian sector gradually opens up a “second growth curve” for the industry, broadens development space, promotes the development of the titanium industry into the fields of household titanium, medical care, 3C, construction, new energy, new materials, environmental protection, etc., and effectively increases the demand for titanium.

Investment advice

1. As the main supplier of titanium products in China's aerospace sector, the company is expected to fully benefit in an environment where high-end titanium products are in short supply; 2. The company aims to form 0.05 million tons of titanium products and a certain amount of zirconium, nickel and other metal products as the “14th Five-Year Plan” goal to achieve 0.04 million tons of titanium product production as the business target for 2024. The goal is set to raise the company's production, sales, and performance; 3. The company actively explores the business needs of emerging markets such as petrochemicals, chlor-alkali, hydrogen energy, and 3C, and transforms the stock market into The incremental market brings business growth; 4. The price reduction of titanium sponge reduces pressure on the company's cost side and is expected to increase profits; 5. The gradual warming of international market business is expected to promote the development of foreign trade business and bring new market growth.

We expect the company's revenue for 2024-2026 to be 6.876 billion yuan, 7.346 billion yuan, and 7.862 billion yuan, with net profit to mother of 0.523 billion yuan, 0.624 billion yuan and 732 million yuan respectively, and EPS of 1.09 yuan, 1.31 yuan, and 1.53 yuan respectively. We maintain a “buy” rating with a target price of 40 yuan, corresponding to PE of 37 times, 31 times and 26 times, respectively.

Risk warning

Competition in the industry has intensified, production capacity has not started smoothly, raw material prices have risen, etc.