Events:

The company released its semi-annual report for 2022, with revenue of 4.659 billion yuan, an increase of 47.57% over the same period last year, and a net profit of 388 million yuan (deducting 356 million yuan), an increase of 51.06% (48.46%). The current net amount is 94 million yuan, a sharp decrease of 79.73% over the same period last year. ROE (weighted) was 10.54%, up 2.28% from the same period last year.

Q2 increased income in a single quarter but did not increase profits; the sharp improvement in Wanhong's profitability showed that different dimensions of Q2's business sectors were affected by the epidemic, and the overall gross profit margin fell 2.46 percentage points from the previous month. Q2's revenue in the single quarter was 2.308 billion yuan, an increase of 30.36% over the same period last year, while the net profit of returning home was only 134 million yuan, an increase of only 9.56% over the same period last year. Mainly because of the correction in the price of Q2 rare earths and the significant increase in the price of rare earth waste, the gross profit margin of the company's rare earth recycling business fell sharply by 9.20 percentage points to 12.88% in the first half of the year.

Jiangxi Wanhong, which the company acquired last year, made a net profit of 86 million yuan in the first half of the year, and its profitability was significantly higher than that before the merger and 2021. The initial results of integration show that the company has strong management and technology export capacity, and Xintai Technology can be replicated.

Ganzhou Huazhuo put into production to help rare earth recovery capacity expansion, vertical and horizontal extension is worth looking forward to.

Ganzhou Huazhuo, a joint venture between the company and southern rare earths, has been put into production, with a rare earth waste treatment capacity of 60,000 tons per year and a production capacity of more than 12000 tons corresponding to praseodymium neodymium oxide. The company currently has an approved production capacity of 4000 tons / year, and plans to expand production to more than 10,000 tons in the future. The commissioning of Ganzhou Huazhuo will effectively guarantee the company's supply of rare earth waste materials.

The company also has a magnetic capacity of 3000 tons per year and has strong profitability. In the future, the company is expected to expand and upgrade its production capacity to advance into the field of high-end magnetic materials. In addition, as a leading enterprise of disassembly equipment, the company has the potential to extend to the upstream areas such as new energy vehicle disassembly and motor disassembly, and the integrated industrial chain layout will enhance the company's overall profitability and market competitiveness.

The remarkable high growth of carbon reduction in electric furnace steelmaking determines that the scrap industry chain is expected to continue to boom. the iron and steel industry accounts for 15% of the country's carbon emissions, accounting for the largest proportion of the manufacturing industry. The carbon emission intensity of long process steel per ton steel is about 1.46t CO2/ ton steel, while that of short process electric furnace is 0.08.The carbon reduction effect is significant. Therefore, the development of electric furnace steel is an effective means to promote carbon emission reduction in the industry. A number of policies such as the guidance on promoting the High-quality Development of the Iron and Steel Industry encourage the development of short-process steelmaking.

Scrap is the main carbon raw material for short-process EAF steelmaking, which will significantly benefit from the increase of EAF steel production capacity. In 2021, the scrap steel used in steelmaking in China is about 233 million tons, accounting for 22.56% of crude steel output.

This level has much room for improvement compared with the international average level of 36%. At the same time, China has entered a high growth cycle of automobile scrap, which will also become one of the important growth points of the scrap industry.

Valuation analysis and rating description

It is estimated that the company's return net profit from 2022 to 2024 is 698 million, 996 million and 1.283 billion respectively, corresponding to PE of 19x, 13x and 10x. The company's continuous release of rare earth recycling capacity is expected to promote sustained high performance growth and maintain the "recommended" rating.

Risk hint: rare earth prices fluctuate more than expected, the risk of poor cost control of each business.