Net profit increased significantly year over year in Q3. According to the Q3 performance forecast, the company achieved a sharp increase in profit. As of Q3, the company achieved net profit of 28-31 million yuan (YOY +80%-100%) and achieved net profit of 22-240 million yuan (YOY +100%-120%) after deducting non-net profit of 22-240 million yuan (YOY +100%-120%). Looking at Q3 in a single quarter, net profit returned to the mother was 7968—89.64 million yuan (YOY +60%-80%), and net profit of 7036-78.89 million yuan (YOY +65%-85%) was deducted. The main reasons for the sharp increase in the company's performance are 1) the continuous expansion of the testing business, and the increase in performance is significant; 2) the profit level of permanganese products has increased dramatically; 3) the performance of participating companies has grown rapidly, and investment returns have increased dramatically.
We have been deeply involved in testing for more than 30 years, and have sought comprehensive development. The company's subsidiary, the Zhengzhou Metal Products Research Institute, is a third-party inspection agency approved by the AQSIQ. It has a history of more than 30 years, is fully qualified, and is deeply involved in the field of railway engineering. The 2017-2021 revenue CAGR was 36.2%, and the gross margin of 202H1 reached 56.3%.
The company's business is spread across the country, and the railway inspection market share is expected to continue to increase; at the same time, the company is actively expanding its non-iron business in infrastructure fields such as roads and bridges through mergers and acquisitions, which is expected to continue to create business growth points.
Production and sales of permanganese are booming, and expanding production is seizing the market. 1) Device-side capacity expansion: The company currently has 15,000 tons of permanent magnetic components, 2.0 thousand tons of rare earth permanent magnet components, 3.0 thousand tons of soft metal powder (to be expanded to 7,000 tons), and 1.0 thousand tons of metal magnetic core production capacity (to be expanded to 5,000 tons). 2) Seizing the market on the raw material side: It currently has a production capacity of 50,000 tons of electronic grade and 5,000 tons of battery grade manganese tetroxide. Based on forecasting future demand growth in the high-performance lithium manganate market and potential lithium manganese-ferrophosphate market demand, it is planned to add 10,000 tons of battery-grade four-manganese, and production capacity is expected to be released in early 2023. Benefiting from the decline in electrolytic manganese raw materials in 2022, the company's demand for four-manganese orders surged. Currently, supply is in short supply. We believe the company is expected to rapidly increase profits by expanding production.
Focus on medium- to long-term incentives, and add new points of interest to testing. In September 2021, the company proposed equity incentives to grant 13.28 million stock options to 148 people at a price of 4.15 yuan/share. Under favorable incentive conditions, the testing business has grown rapidly, with revenue CAGR of 36.2% in 2017-2021, and the company has successively obtained infrastructure fields such as roads and bridges in the past two years to expand its non-ferrous business, actively explore incremental markets such as the environment, EMC and electronics, and create new business growth points. The market share is expected to gradually increase.
Hosted by Baowu, focusing on catalysis. China Steel Group was managed by China's Baowu in October 2020 and is currently at the end of the trusteeship period. Baowu is the world's largest steel company. The company is expected to be deeply integrated into Baowu's “one base, five yuan” business plan, share excellent management mechanisms, management methods, scientific and technological achievements and capital, and benefit from the background of majority shareholders to obtain upstream resource endowments and become a first-tier magnetic material supplier.
Profit forecast: Net profit attributable to the parent for 2022-2024 is estimated to be 39/54/7.1 billion yuan respectively, corresponding EPS is 0.52/0.71/0.94 yuan/share, and corresponding PE is 19.2/13.9/10.6x. The company's testing business has a good incentive system, and the magnetic materials business is enjoying industry growth. It is expected to maintain high revenue and profit growth in the future and maintain a “buy” rating.
Risk warning: The growth rate of downstream demand for magnetic materials falls short of expectations, testing business expansion falls short of expectations, risk of fluctuations in raw material prices, etc.