2021 results slightly beat market expectation
Tiangong International announced its 2021 results: Revenue rose 10.0% YoY to Rmb5.74bn, and attributable net profit rose 23.7% YoY to Rmb664mn. In 2H21, Revenue grew 15.4% YoY to Rmb3.13bn, and attributable net profit increased 14.7% YoY to Rmb374mn. Its 2021 results slightly beat market expectation.
Sales volume grew steadily. The firm's overseas sales volume of die steel （DS）， high-speed steel （HSS）， precision cutting tools, and titanium alloy in 2021 reached 0.165mnt （-9.3% YoY）， 24,099t （+6% YoY）， 335mn pieces （+7.4% YoY）， and 3,467t （+50.5%）。
Profit of products improved. In 2021, unit selling prices of DS, HSS, and precision cutting tools reached Rmb14,510 （+12.2% YoY）， Rmb41,720 （+22.3% YoY）， and Rmb3.2 （+14.3% YoY）， thanks to the increased share of high-end products in the firm’s product portfolio. The unit gross margin （GM） was 32.5% （+4.4ppt YoY） for HHS and 28.4% （+9.5ppt YoY） for precision cutting tools. Unit GM fell 1.5ppt YoY to 26.6% for DS in 2021 due to the cancellation of export VAT refund policy. The firm’s overall GM grew 1.2ppt YoY to 24.5%.
Marketing expense ratio increased 2.1ppt YoY to 3.8% in 2021, mainly due to recovering export volume and increasing freight rates and logistics costs.
Asset quality continued improving. At end-2021, asset-liability ratio fell 4.5ppt YoY to 45.1%, and interest-bearing debt ratio dropped 14.0ppt YoY to 46.5%.
Trends to watch
Strong cost pass-through capability and growing exports despite macro headwinds highlight firm’s global competitiveness. The firm launched price hike announcement 12 times in 2021. Unit sales prices of its products rose 12.9% in 2021 due to rising alloy prices. The firm has raised its core product prices 6 times in a row since early 2022. This reflects the firm's strong cost pass-through capabilities and bargaining power. We expect GM of its products to remain stable and grow slightly in 2022. Although the export tax rebate policy was cancelled and shipping costs rose sharply in 2021, the firm's export value of core products increased 47.1% YoY. This indicates that its products are globally competitive, in our view. We note that steel supply in Europe has tightened due to the Russia-Ukraine conflict, and the ramp-up of oil prices is widening the steel price spread between China and overseas markets. As a result, we expect export of the firm’s core products to continue to grow.
The structure of product portfolio optimizing; organic growth foreseeable. In 2021, the share of DS with high alloy content and HSS in the firm’s product portfolio rose 7ppt and 4ppt YoY to 78% and 64%. Sales volume of powder metallurgical products increased 388t YoY to 471t. Meanwhile, the firm is expanding into high-end precision cutting tools. Its cemented carbide cutting tool and powder tap projects is proceeding smoothly. The performance of powder tap and drill bits is also improving. In our opinion, its expansion into the powder materials and high-end cutting tools sectors will pay off. We expect rising sales of high value-added products to contribute earnings to the firm moving forward. We are upbeat on the firm’s organic growth.
Financials and valuation
We keep our 2022 and 2023 EPS forecasts at Rmb0.34 and Rmb0.43. The stock is trading at 8.1x 2022e and 6.4x 2023e P/E. We maintain an OUTPERFORM rating. Given the wide fluctuations in the H-share market recently, we cut our target price 11.1% to HK$5.6, implying 14.1x 2022e and 11.2x 2023e P/E with 75% upside.
Risks
Alloy material prices plunge; economic growth slows.