20180712-中国银河国际证券-天工国际-00826.HK-ASP_hike_for_die_steel_in_July__operation_remains_intact_despite_of_steel_tariff_3页_817kb

Tiangong International Summary

Core Content

Tiangong International (826.HK) is a Hong Kong-listed company primarily engaged in the manufacture and sale of high-speed steel (HSS), HSS cutting tools, and die steel. The company has reported positive performance in the first half of 2018, with expectations of a net profit growth of over 100%. Its operations have remained stable despite the US steel tariffs, as the company has successfully passed on the increased costs to most of its US clients.

Main Points and Key Information

1. ASP Hike for Die Steel

• Tiangong raised the average selling price (ASP) for die steel by RMB1,000/tonne in July 2018.
• This increase was driven by the strong momentum in vanadium prices, with vanadium-50 prices rising 29% month-over-month (MoM) in June 2018.
• The company's die steel segment accounts for 42% of total revenue in 2017 and is expected to see a 13%–18% YoY increase in ASP for FY18E.

2. Titanium Alloy Business Recovery

• The titanium alloy segment saw a 28% YoY revenue decline in 2017 due to credit control measures that reduced sales volume by 43%.
• Management indicates that the impact of these measures is fading, and the segment is expected to report high-single-digit revenue growth and positive sales volume growth in 2018E.

3. Steel Tariff Impact and Market Expansion

• The 25% US steel tariff imposed in March 2018 has been effectively passed on to US clients.
• Tiangong is actively expanding in the European market to offset potential negative impacts from trade tensions, with Europe contributing 22% of total revenue in 2017 (North America: 13%).

4. Chairman's Stake Increase

• Chairman Zhu Xiaokun and his spouse increased their stake in Tiangong from 31.2% to 32.35% in June 2018, investing HK$53m at an average price of HK$1.78 per share.
• This move is seen as a sign of management confidence in the company's performance and future outlook.

5. Powder Metallurgy Project

• The first phase of the powder metallurgy project is expected to begin production in H2 2019.
• This technology is expected to offer better material utilization and product design flexibility, and once ramped up, the segment could achieve a GPM of ~30%, compared to 12.8% in 2017.
• The powder metallurgy products will be sold in China and overseas markets, including Austria and other European countries.

6. Military-Use Titanium Business

• The company is on track to obtain its third military-related business license, which will allow it to participate in the military-use titanium business.
• This could boost investor sentiment, as the HK market currently has limited military-related companies.

7. Valuation and Performance

• Tiangong is currently trading at 12.4x 2018E PER and 0.9x 2018E PBR, which is considered undemanding given the expected ~50% net profit growth in 2018E.
• The company's future growth is supported by:
  • ASP hikes in die steel
  • Ramp-up of powder metallurgy production
  • Orders from global luxury car brands like Mercedes-Benz and BMW

8. Peer Comparison

• Compared to other HK-listed steel companies, Tiangong has a lower PER and PBR, suggesting it may be undervalued.
• It has also shown better dividend yields and more positive share price performance in recent periods.

Key Financials (2016–2018E)

Metric	2016	2017	2018E
Revenue (m)	3,376	3,898	4,277
Gross Profit (m)	372	498	654
Gross Margin (%)	11	13	15
Net Profit (m)	111	169	258
Net Margin (%)	3	4	6
EPS	0.05	0.08	0.11

Risk Factors

• High gearing (leverage)
• Higher-than-expected capital expenditure (CAPEX) for the powder metallurgy project
• Market sentiment negatively impacted by US-China trade war news

Analyst Rating

• BUY: Expected share price increase of >20% within 12 months
• HOLD: No clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to SELL

Catalysts

• News on further ASP hikes
• Ramp-up of powder metallurgy production line

Company Background

• Listed in 2007
• Previously the largest manufacturer of HSS and HSS cutting tools in China in 2016

Figures and Data Highlights

• Figure 1: China Special Steel Price Index
• Figure 2: Vanadium, molybdenum, and chromium prices in China
• Figure 3: Historical gross profit per tonne for die steel, HSS, and titanium alloy
• Figure 4: Historical PBR range for Tiangong
• Figure 5: Peer comparison table showing PER, PBR, dividend yield, and share price performance

Conclusion

Tiangong International is positioned for growth with positive momentum in its die steel business, recovery in the titanium alloy segment, and expansion into the European market. The company's valuation is seen as attractive, and the upcoming powder metallurgy project and military business license are key growth drivers. However, risks such as high leverage and trade war impacts remain.