1H18 performance is lower than expected.

Zhangyuan tungsten industry announced 1H18 results: operating income was 940 million yuan, down 2.6% from the same period last year; net profit attributed to the parent company was 17.37 million yuan, an increase of 2.4x year-on-year, corresponding to 0.02 yuan per share; net profit after deducting non-parent net profit was 10.32 million yuan, up 17% from the same period last year, which was lower than expected, mainly due to higher-than-expected financial expenses and asset impairment losses. 2Q18's single-quarter revenue was 470 million yuan, down 15.5% from the same period last year, 0.4% from the previous month, and its net profit was 10.73 million yuan, up 5.4x from the same period last year and 62% from the previous year. The main reason for the year-on-year improvement in the first half and second quarter was the increase in tungsten product prices.

Comments: 1) benefit from the rise in prices. The average price of 1H18 domestic tungsten concentrate is 120000 yuan / ton, which is + 42% compared with the same period last year, and the average domestic APT price is 175,000 yuan / ton, which is + 10% year on year. 2) improvement of gross profit margin. 1H18's comprehensive gross profit margin increased to 16.5% year-on-year, including ammonium paratungstate + 8.9ppt to 19.2%, tungsten powder from + 4.5ppt to 18%, tungsten carbide powder from + 4.9ppt to 19%, cemented carbide + 1ppt to 10%. 3) Financial expenses increased by 74% year-on-year to 37.34 million yuan, affecting after-tax EPS of 0.015 yuan, mainly due to an increase in interest expenses, and the financial expense rate increased from + 1.7ppt to 4.0% compared with the same period last year. 4) the loss of asset impairment increased by 68% to 14.66 million yuan compared with the same period last year, mainly due to changes in inventory prices. 5) the net cash flow of operating activities is-27.03 million yuan, compared with-250 million yuan in the same period last year. 6) the effective tax rate decreased by 23ppt to 40% compared with the same period last year.

Trend of development

The downside of tungsten price is limited. Tungsten prices have fallen back recently, with tungsten concentrate / APT down 8 per cent and 6 per cent in the past month. Tungsten is mainly used in cemented carbide. Looking to the future, we believe that tungsten demand is expected to benefit from the marginal stabilization of the manufacturing industry, there will be no loosening of environmental protection at the supply side, and the downward space for tungsten prices is limited, which is expected to maintain a relatively ideal level.

Project schedule: after the deep extension and technical transformation project of Xin'anzi Tungsten and Tin Mine is put into production, the mining of deep resources will be increased, the ore grade will be improved, and the benefit of 1H18 will be 8.24 million yuan.

Profit forecast

We slightly increase the assumption of tungsten price, but at the same time raise the assumptions of financial expenses and asset impairment loss to reflect the actual situation of 1H18. We comprehensively consider that we will lower the profit forecast of 2018 Lexi 19e by 23% to RMB0.04 / RMB0.04 from RMB0.05b / RMB0.05e.

Valuation and suggestion

The company's share price maintained a neutral rating of 2.9pm 2.8 times Pamp B in 18hammer 19, but taking into account lower-than-expected results and a downward valuation in the market, we lowered our target price by 26% to $7.0, corresponding to 3.3pm in 18max 19, which means there is room for an increase of 13% compared to the current share price.

Risk

Tungsten prices fell more than expected.