Zhongtai: The "supply-side reform" of cutting tools has been launched, and the industry's upward cycle has been established.

Zhongtai released a research report stating that the essence of the periodic performance of cutting tools is the fluctuation of cutting tool prices; the upward trend in tungsten carbide prices will be a decisive factor in opening up the future long-term upward cycle of cutting tools. The industry is bidding farewell to the deflation trend and entering an upward cycle, with companies welcoming a revaluation of their value. Recommendations to focus on companies with technical research and development capabilities or synergy with upstream raw materials: Zhuzhou Huarui Precision Cutting Tools Co., Ltd (688059.SH), OKE Precision Cutting Tools (688308.SH), China Tungsten and High-tech Materials (000657.SZ). The main points of Zhongtai are as follows: Cycle judgment: Price deflation ends, starting an upward cycle The fluctuation of cutting tool cycles can be clearly broken down into an analysis framework of two major factors: quantity and price. 1) Quantity end: as a consumable, the demand for cutting tools is positively correlated with industrial added value, meaning a long-term upward trend in the demand for cutting tools. 2) Price end: cutting tool prices become the core factor affecting the industry cycle; tungsten carbide, accounting for 52% of the main BOM cost, has become the anchor that ultimately affects the cutting tool cycle, given the current significant price increase. How to view the trend of tungsten carbide prices? High price central operation may become the norm in the industry. 1) On the supply side, China's tungsten ore mining quotas decreased by 6.45% year-on-year in 2025, coupled with export controls, increased environmental inspections, and limited increases in overseas projects, leading to a continued tightening of global supply. 2) On the demand side, China's tungsten consumption CAGR from 2020 to 2024 reached 5.52%, coupled with growth in overseas military spending and upgrades in high-end manufacturing driving, the global supply-demand gap will increase from 12,400 tons in 2024 to 22,000 tons in 2027. 3) In addition, tungsten is a strategic key metal in the defense and high-end manufacturing sectors (On February 4, 2025, the Ministry of Commerce and the General Administration of Customs legally implemented export controls on tungsten, tellurium, bismuth, molybdenum, and indium related items to safeguard national security interests and fulfill international non-proliferation obligations). In addition to the profit demands of upstream tungsten companies and the policy orientation of "anti-inner-cycling," support for high-price tungsten carbide operation. In summary, the cutting tool industry has entered a clear upward cycle. The core of determining the prosperity of cutting tools lies in prices, and the core contradiction of prices lies in the supply and demand of tungsten carbide; against the background of long-term tightening of tungsten carbide supply, cutting tool prices will inevitably enter an upward range. Competitive landscape: Cutting tool industry welcomes "supply-side reform" with industrial consolidation Foreign capital is shrinking passively, and import substitution is accelerating. 1) From 2018 to 2022, China's cutting tool imports decreased from 14.8 billion yuan to 12.6 billion yuan, while exports increased from 18 billion yuan to 23.2 billion yuan. The market share of imported cutting tools decreased from 37.26% in 2016 to 27.16% in 2022. 2) European, American, Japanese, and Korean companies are showing a downward trend in revenue in China. 3) Japanese companies are affected by China's Ministry of Commerce's policy on dual-use export controls, and their future production capacity and market share may be affected. State-owned Enterprises Withdraw as Private Enterprises Advance. 1) State-owned enterprises have occupied a large market share in the past few years based on policy support and resource advantages, but their management level and innovation drive have defects. 2) Private enterprises have demonstrated significant innovation advantages and market vitality. 3) In terms of performance, private cutting tool companies have shown impressive growth trends. By 2025, as tungsten carbide prices rise rapidly, small and medium-sized cutting tool companies face elimination, and the strong become stronger. 1) Mining companies are generally shortening their accounts payable periods, demanding higher cash flow from cutting tool companies, leading to cash flow problems for small and medium-sized cutting tool companies. 2) As cutting tool products experience a significant price increase, end customers demand higher quality and performance of cutting tools, leading to quality problems for small and medium-sized enterprises. As the clearance of low-priced tungsten carbide inventory continues, the phenomenon of small and medium-sized cutting tool companies being forced to close becomes more prominent; the competition pattern of the cutting tool industry changes from price dominance to technology dominance, benefiting top companies with technical research and development capabilities, which is referred to as the "supply-side reform" in the cutting tool industry. Fundamental evidence: The cutting tool industry improved in the first three quarters of 2025, with differentiation within the industry, and the strong become stronger The three tables repair synchronously, establishing an upward cycle in the industry. In terms of the income statement, revenue and net profit attributable to the parent company both rose synchronously. In the first three quarters of 2025, the year-on-year growth rates of revenue and net profit for the parent company increased compared to the past two years, reaching 23.12% and 13.62% respectively. Revenue and net profit for the industry in the first three quarters show high growth, with year-on-year growth rates of 31.92% and 84.16% respectively, indicating a turning point in the industry. Gross profit margin and net profit margin steadily increased in 2025, reaching 36.96% and 13.70% in the first three quarters, respectively. In terms of the balance sheet, operating quality continued to improve, with inventory turnover days at 214.20 and accounts receivable turnover days at 122.22 in the first three quarters of 2025, showing significant improvements in inventory turnover efficiency in the second and third quarters. In terms of the cash flow statement, operating cash flow optimization turned positive in the first half of 2025, with positive operating net cash flow in the first three quarters of the year. Within the sector, differentiation highlights the pattern of the strong becoming stronger. In terms of revenue performance: Zhuzhou Huarui Precision Cutting Tools Co., Ltd, Shareate Tools Ltd show outstanding revenue performance; in terms of profit: Zhuzhou Huarui Precision Cutting Tools Co., Ltd, Shareate Tools Ltd, Est Tools Co., Ltd. show outstanding net profit performance; in terms of operating quality: Beijing Worldia Diamond Tools, Est Tools Co., Ltd. and Shareate Tools Ltd show better accounts receivable turnover days, while Est Tools Co., Ltd. and Shareate Tools Ltd show better inventory turnover days, and Zhuzhou Huarui Precision Cutting Tools Co., Ltd, Beijing Worldia Diamond Tools, Est Tools Co., Ltd. and Shareate Tools Ltd show outstanding cash flow performance. Risk warnings: Risks of tungsten carbide price decline, policy changes, and risks of outdated information in the research report.