Bao Ti Co., Ltd.: low valuation, High growth military Titanium Alloy leading Aerospace Prosperity upward [Agency Review]

Card position Aerospace prosperous racetrack, the leading position in the industry. As the leader of domestic military titanium alloy, the company has layout in aviation, aerospace and aviation direction, and the demand side is expected to be more certain in 2022, among which: 1) Hangfa, the company's titanium alloy bars are mainly used to produce engine blades, protective plates and other cold-end components, occupying a dominant position in the supply side, and the incremental demand brought about by Taihang series and its retrofit is growing rapidly, which is the main source of military income at present. 2) Aerospace, the company's titanium alloy plate is mainly used in liquid fuel engine combustion chamber, rocket engine shell and other directions. Considering the gradual batch production and accelerated loading of aeronautical and aerospace key weapons and equipment, it is expected to further accelerate the upward trend of the company's military business.

Structural optimization, superimposed technical transformation and production expansion are expected to boost profit elasticity. In 2020, the actual titanium processing capacity of the company reached 22700 tons, exceeding the design capacity by 13.57%. It is mainly divided into three major directions: military, civilian and foreign trade. Considering the impact of the epidemic, the recovery of foreign trade demand is relatively slow, and the company's overall production capacity has some room for optimization. in addition, the company can also increase its production capacity by means of technological transformation. It is expected that with the optimization of the company's production capacity structure and the landing of related technical transformation and fund-raising projects, it will further promote the upward elasticity of the company's comprehensive profit margin.

Sponge titanium self-supply capacity is enhanced, is expected to continue to thicken the company's performance. Titanium processing materials are formed after remelting and pressure processing of sponge titanium. According to the Dingzeng announcement, the output of titanium sponge from 2017 to 2019 is 8765, 9189 and 9133 tons, respectively, of which 50% of the products are used for external sales. The rest is to ensure the supply of raw materials within the company. According to the semi-annual report, the progress of the project of "12000 tons of sponge titanium expansion project" has reached 59.6%. It is expected that after the new production capacity reaches production, it can not only further enhance the company's sponge titanium self-supply capacity, but also hedge the upstream sponge titanium price pressure and stabilize the company's profitability.

Investment suggestion: as the leading military titanium alloy enterprise in China, the company will continue to benefit from the high demand growth brought by the two prosperous racetracks of Aeronautics and Aerospace, and with the promotion of the company's technological transformation and the gradual commissioning of new production capacity, it is expected to boost the company's performance. We expect the company's 2021-2023 net profit to be 7.22,10.82 and 1.44 billion yuan respectively, with a corresponding valuation of 45,30 and 23 times, covering for the first time and giving a "buy-A" rating.

Risk hint: military orders are not as expected.