What's new
OKE Precision Cutting Tools (OKE) on November 23 announced that itswholly-owned subsidiary Zhuzhou OKE plans to invest Rmb749mn to builda computer numerical control (CNC) cutting tool industrial park. Theplanned investment includes Rmb212mn for a 1,000t/yr high-performancecarbide rod production line, Rmb257mn for a 3mn unit/yr cemented carbidecutting tool production line, Rmb113mn for a 0.2mn unit/yr CNC cutting toolproduction line, Rmb75mn for a 5mn unit/yr cermet blade and 0.1mnt/yrserrated blade production line and Rmb92mn for an R&D office building.
Comments
Expanding production capacity for carbide rods and cementedcarbide cutting tools to unleash growth potential. OKE earmarks 63%of its planned investment for the carbide rod and cemented carbide cuttingtool projects. The firm has bought the construction site via an auction. Itexpects the construction to last 18 months and these new projects to startproduction in 2023. 1) Carbide rods: This product generated nearlyRmb50mn in revenue in 3Q21 (on par with the full-year revenue recordedin 2020). We estimate that carbide rod revenue will climb nearly 80% YoYin 2021. We expect the firm's production capacity of carbide rods to reach1,200t/yr and revenue from this product to increase by around Rmb200mnafter the new project starts operation. 2) Cemented carbide cutting tools:
We estimate that China's cemented carbide cutting tool market exceededRmb10bn in 2020. OKE has rolled out several products for this market,which we think will help unleash its growth potential.
Investing in cermet blade project shows determination to enterhigh-end markets. The price and gross margin (GM) of cermet blades arehigher than those of cemented carbide blades. Cermet blades are crucialto aerospace technology and auto engine manufacturing industries. After2–3 years of R&D, the firm is now capable of mass-producing cermetblades. We think that the plan to increase production capacity for cermetblades, serrated blades and other high-end products shows the firm’sdetermination to enter high-end markets in Japan and South Korea.
Ample orders on hand; earnings likely to beat expectation in 2022.
The firm now has two growth engines, i.e. cemented carbide tools andCNC cutting tools business. We think that expanding carbide rodproduction capacity will fuel the growth of the cemented carbide tools business and that CNC cutting tools will likely serve as a new growth driverfor the company. OKE now has ample orders on hand (production for thecurrent orderbook may start in 2–3 months). The projects funded by IPOproceeds are scheduled to start production in early 2022. We believe this,coupled with the production lines for high-value-added products, may driveearnings to exceed expectation in 2022.
Valuation and recommendation
We leave our EPS forecasts unchanged at Rmb2.4 for 2021, Rmb3.0 for2022 and Rmb4.0 for 2023. The stock is trading at 24x 2022e P/E. Wemaintain an OUTPERFORM rating and a target price of Rmb91 (30x 2022eP/E), offering 25% upside.
Risks
Capacity expansion of IPO-funded projects disappoints; volatile rawmaterial prices; improvements in the performance of high-end product linesfall short of expectations; cutting tool supply moves overseas upon therecovery of overseas supply chains.