The company focuses on R&D, production and sales of alloy materials. The business gradually expanded from alloy pipes (copper-based alloys) to nickel-based corrosion-resistant alloys and superalloys. Since 2015, it has increased its strategic investment in the superalloy business, and has successively built a cast superalloy production line and a deformed superalloy production line. The company's core technology is at the leading level in China. As a strategic key business where the company invests its main resources, the superalloy business is expected to continue to grow.

The production organization is continuously optimized, and profitability is expected to bottom out. The company's total revenue CAGR is 32.78%, net profit to mother is CAGR 63.88%, total operating revenue for Q1-Q3 in 2023 is 100 million yuan, up 25.6% year on year, and net profit to mother is 80 million yuan, up 11.15% year on year. The company's 2023Q1-Q3 net profit margin was 8.87%, down 1.05 pcts year on year, gross profit margin was 16.22%, down 2.08 pcts year on year.

The deformed superalloy production line was put into operation in early 2023. Although production capacity increased significantly, the company's products are still in the model certification period, and capacity utilization rate declined briefly. At the same time, along with pressure on raw materials and energy, the company's profitability declined in stages. We believe that as the company's product model certification progresses, it is expected that superalloy production capacity will gradually be released or the gross sales margin will continue to increase.

High nickel prices have led to a sharp increase in cost pressure. After testing the company's profitability, the average annual price of spot nickel rose by about 43.83% year-on-year in 2022, putting a lot of pressure on raw material costs for midstream high-temperature alloy manufacturers. The company's revenue in 2022 increased by 31.11% year on year, net profit to mother increased by 34.52% year on year, and the performance maintained relatively steady growth. We believe that raw material prices are expected to return to a reasonable range in 2023, the pressure on the company's material costs may gradually weaken, and the company's operating capacity and profitability may gradually recover.

Continue to invest in superalloy production lines, and expand production capacity to guarantee the product supply company expects to reach a production capacity of 18,000 tons of superalloys by 2028, including 13,000 tons of deformed superalloys and 5,000 tons of cast superalloys. We believe that the fund-raising and production expansion project will further build on the company's production capacity side. After the multi-model verification process is implemented, the company's business development in the field of superalloys can be expected. While the scale of the company's revenue is increasing, scale effects are formed based on industrial characteristics to reduce production costs, optimize the company's financial indicators, and increase overall profitability and market share.

Cast superalloys and deformed superalloys have been introduced and verified in many batch production and scientific research models of aero engines and gas turbines, and many brands have completed or are undergoing long-term testing of engines. The company's superalloy business, including military products, continued to grow rapidly, and its business performance improved significantly. We believe that advanced process advantages will help enterprises develop unique competitiveness, and may provide technical support for further entry into the superalloy supply chain and establish a solid growth point for the company's business growth.

The batch supply of superalloys with various license plates has paved the way for customers in various fields to gradually advance military superalloy model certification during a period of rapid development, and there is plenty of room for growth; in the civil sector, the development and batch production of new aviation models accelerated and superimposed the recovery of the international civil aviation market, and the high level of prosperity was transmitted to upstream material suppliers through the industrial chain. The company has now passed military certification for various superalloy models. The batch supply of some grades covers domestic and international civil aviation markets and various fields such as gas engines, oil and gas chemicals, etc., and has entered the supplier lists of well-known companies. We believe that as a new entrant in the military goods market, the company has plenty of room for development and is currently in a period of rapid development. After more grades are imported and verified by downstream customers, the release of superalloy production capacity may become the core driving force for the company's future performance.

Profit forecast and rating: We believe that with the implementation of multiple model certifications for military products, production capacity is expected to be quickly released in the next 3 years; at the same time, with the rapid growth of oil and gas chemicals, gas turbines, etc., various fields of downstream superalloys are blossoming, and the company's superalloy business is expected to continue to grow. Under this assumption, it is predicted that the company's net profit for 2023-2025 will be 123 million yuan, 189 million yuan, and 249 million yuan, respectively, corresponding EPS of 0.50 yuan/share, 0.77 yuan/share, and 1.01 yuan/share, respectively. Corresponding to the current PE of 44.31, 28.76, and 21.83 times, the 23-year PE60-65x corresponds to the target price range of 30.0-32.5 yuan/share. The first coverage gives a “buy” rating.

Risk warning: Risk of fluctuations in the company's military business, risk of long-term agreements being terminated or unsustainable, risk of supply shortages and price increases of key raw materials, risk of uncertain progress and results of product introduction verification, industry risk.