Caixin Securities: the growth of medium tungsten high-tech industry has strong certainty and the leading growth of high-end tools has no worries.

Cemented carbide leading manufacturers, a number of products leading the domestic. The company is engaged in the whole industry chain business of tungsten cemented carbide and tungsten, molybdenum, tantalum, niobium and other non-ferrous metals. According to the revenue scale, the products can be divided into four categories: cemented carbide (29.69%), blades and cutting tools (24.47%), compounds and powders (38.37%) and other products (7.46%). The cemented carbide products account for more than 25% of the domestic market and lead the world in cemented carbide production. The products of blades and cutting tools are first-class in China, with more than 30, 000 kinds of CNC blades, ranking first in the country. Tungsten resources account for 13% of the country's total reserves, and the annual production capacity of tungsten smelting accounts for 10% of the national APT production capacity.

Revenue is growing steadily and profitability is increasing. The company's performance has maintained steady growth since 2016, with operating income CAGR of 17.5% and net profit CAGR of 103% from 2016 to 2020. In terms of profitability, the company's gross profit margin remained stable at around 20% from 2016 to 2020. Affected by the rise in tungsten raw material prices since 2021, 2021H1's comprehensive gross profit margin was 17.9%, a decrease of 3.1pct compared with the same period last year. As the company deepens its system reform and strengthens its management capacity, the expense rate during the company period has dropped significantly, with 2021H1 of 11.5%, year-on-year decrease of 3.4%, Q2 of 10.1%, year-on-year decrease of 3.7 pct, and continuous reduction of 3.4pct compared with the previous year. Driven by the decline in the expense rate, 2021H1's net interest rate increased by 0.6 pct year-on-year to 4.0%, and its profitability continued to improve.

The logic of industry growth has strong certainty, and the company has fully benefited as an industry leader. In the short term, the high demeanor of the manufacturing industry that started in the second half of 2020 has given rise to a hot demand for CNC cutting tools. The company has full orders and production capacity is in short supply. The annual production of CNC blades in 2021 is expected to be about 90 million pieces. In the long run, the improvement of cemented carbide material permeability, CNC machine tool permeability and the proportion of tool consumption will increase the scale of domestic cemented carbide tool market for a long time, and the company will fully benefit as a leader. In addition, domestic CNC tool imports rely on more than 30%, and medium-and high-end tools rely on more than 60%. At present, domestic tool demand is strong, and the epidemic has caused a gap in overseas supply. At the same time, domestic technology has broken through the bottleneck. Domestic tools are ushering in an excellent opportunity to replace.

Investment advice. It is estimated that from 2021 to 2023, the company will achieve a net profit of 393 million yuan, 496 million yuan and 592 million yuan, the corresponding EPS is 0.37,0.46 and 0.55 yuan respectively, and the corresponding PE is 35.16,27.83,23.30 times respectively. Referring to the valuation level of similar companies and comprehensively considering the company's leading position in the field of cemented carbide and CNC cutting tools, the company will be given 36-39 times PE, in 2021. Corresponding to the reasonable valuation range of 13.32-14.43 yuan, covered for the first time, given a "cautious recommendation" rating.

Risk tips: downstream demand is lower than expected; raw material prices are lower than expected; the company's production capacity is not as expected.