Incidents:
The company published its 2023 annual report. According to the company's announcement, the company achieved operating income of 6.927 billion yuan in 2023, a year-on-year increase of 4.41%, net profit to mother of 544 million yuan, a year-on-year decrease of 2.29%, and net profit after deducting non-return to mother of 475 million yuan, a year-on-year decrease of 7.74%. 2023Q4 achieved operating income of 1,316 billion yuan, a year-on-year decrease of 14.31%, and realized net profit to mother of 0.05 billion yuan, a year-on-year decrease of 111.99%. 2023 results fell short of expectations.
Comment:
Downstream demand for titanium products is strong, and the rapid recovery in international business is driving steady revenue growth. According to the company announcement, overall revenue growth was steady in 2023. According to our analysis, 1) By product, the company's titanium products achieved revenue of 6.301 billion yuan (accounting for 90.96% of total revenue), an increase of 4.37% over the previous year. The company's sales volume of titanium products in 2023 was 294,000 tons (yoy -7.05%), and the company continued to focus on high-end titanium fields such as aerospace. 2) Looking at the subregion, domestic revenue was 5.407 billion yuan (yoy -5.04%), and foreign revenue was 1,333 billion yuan (yoy +77.74%). International business is recovering well, and the growth trend is expected to continue in 2024. We believe that benefiting from the increase in downstream demand, and as the company's production capacity for titanium products is released one after another, the proportion of high-value high-end titanium materials is continuously increased, and the product structure is optimized, and the company's revenue is expected to grow rapidly in the next few years.
Profitability declined due to increased competition in the consumer goods market and pressure on raw material costs. According to the company's announcement, the company's gross margin in 2023 fell 0.46pcts to 21.18% compared to the same period last year, and the net profit margin decreased 0.39pcts to 9.74% compared to the same period last year.
According to our analysis, 1) The decline in gross margin was mainly affected by overseas business. The gross margin of domestic business increased by 1.84 pcts to 25.74% compared to the same period last year, foreign business decreased by 1.86 pcts to 2.03% compared to the same period last year. Foreign business was affected by rising shipping costs, and most of the company's cooperation with foreign customers was long order signing, which could not transfer costs to downstream customers in a timely manner. The decline in foreign business gross margin affected overall profitability. 2) In 2023, the titanium industry was affected by a complex economic environment and a weak investment cycle in some downstream civil applications such as petrochemicals. Demand for titanium declined, market competition was intense, and profitability was under pressure. Our analysis believes that as overseas business continues to recover and the superimposed scale effect increases, the company's gross margin is expected to rise steadily, and overall profitability is expected to resume growth.
Military and civilian exports are making concerted efforts, and the company's future performance is expected to grow rapidly. 1) Military: The company has a forward-looking layout of key models. With the upgrading of aerospace and other fields and the acceleration of domestic substitution, the company will significantly benefit from the loading volume of the main downstream military models; 2) Civilian: As demand in the downstream chemical, petroleum and other industries improves, the company's performance in the civil goods sector is expected to continue to improve; 3) Exports: The company basically includes a pass to enter high-end applications such as aerospace in the world. It is a long-term supplier of leading international aviation companies. As demand in the export market gradually recovers, the company's export business will continue to grow.
The 2024E profit forecast was lowered and the “Buy” rating was maintained. Considering the increase in depreciation and amortization due to the commissioning of the fund-raising project, we lowered the company's net profit forecast for 2024E to 6.52 (previous value was 1,158 billion yuan) and added the 2025-2026E net profit forecast to 7.92/965 million yuan. The PE corresponding to the current stock price is 12 times 18/15/18.
We selected new aviation materials and titanium alloy-related targets as comparable companies, Western Superconducting (titanium alloy and superalloy), Western Materials (titanium alloy), and Tunan Co., Ltd. (superalloy). Comparable companies' average PE value for 2024E was 23X. The company's valuation is lower than the industry average, and considering that, as the core enterprise of titanium products in China, the core benefits from high downstream prosperity, and superimposed management enables cost reduction and efficiency, the company's performance is expected to achieve a competitive growth rate in the next few years, so it maintains a “buy” rating.
Risk warning: military spending falls short of expectations; development or delivery of key products falls short of expectations; production capacity construction falls short of expectations