Key points of investment:
It is the only listing platform under the China Rare Earth Group, and there are strong expectations that high-quality resources will empower them in the future. China Rare Earth Group is the controlling shareholder of the company. In 2022, the group accounted for 67.94% of the domestic medium and heavy rare earth mining quota, 28.96% of the country's smelting and separation quota. It has 72 rare earth mining enterprises and 33 smelting and separation enterprises. The company is the only listing platform under the Group, and the Group's high-quality resource empowerment expectations are strong. At the end of 2022, the company announced that it plans to acquire Jianghua Rare Earth through a non-public offering. Jianghua Rare Earth has the Jianghua Rare Earth Mine with 37,900 tons of rare earth oxide resources and the construction of 5,000 tons of smelting and separation capacity. It is expected that the company's performance will improve dramatically after the Jianghua rare earth injection, and the Group's empowerment will move from expectations to reality.
The company has the entire industry chain from rare earth process technology research and development to rare earth mining and separation and smelting. The company is one of the largest ionic rare earth mining, separation and processing enterprises in southern China. Currently, it is actively promoting exploration and mining work at the Shenggongzhai rare earth mine and the Fetian rare earth mine. The Sanqiutian rare earth mine in Gannan, Jiangxi is also rapidly undergoing upgrading and resuming production; it has 4,400 tons of REO separation capacity in Dingnan Dahua and 3,000 tons of REO in Guangzhou Jianfeng. It has a significant competitive advantage in the domestic rare earth separation and smelting industry.
The long-term supply and demand pattern of the rare earth industry continues to be optimized, and there is room for further increases after prices stabilize. According to our estimates, the supply-demand balance for praseodymium oxide and dysprosium oxide 2023-2025 was 0.39/-0.02/-552,000 tons of REO and 50/-49/-174 tons of REO, respectively. The supply-demand relationship ranged from oversupply in 2023 to a tight balance between supply and demand in 2024 to less supply than demand in 2024. Rare earth prices first fluctuated downward in 2023, but the decline was limited. After stabilizing in 2024, they rose. Prices of rare earth products are still high compared to historical prices, and the company can still have strong profitability.
Profit forecast and investment advice: The company's revenue and net profit from 2021-2024 are estimated to be 14.7% and 38.1% respectively. Its three-year historical PE (TTM) average value was 103 times, giving the company 103 times its PE valuation, corresponding to a market capitalization of 46.5 billion yuan, corresponding to a target price of 47.39 yuan/share. It was covered for the first time and gave a “buy” rating.
Risk warning: injection projects fell short of expectations; downstream demand fell short of expectations; growth in rare earth indicators exceeded expectations.