Revenue is progressing steadily, and profits have been rising throughout the year. In 2022, the company achieved revenue of 2.76 billion yuan (yoy +5.7%), net profit of 3.9 billion yuan (yoy +80.8%), and net profit of 34 billion yuan (yoy +94.6%) after deducting net profit of non-return mother. The main reasons for the sharp increase in the company's performance were ① the testing business developed well, and the increase in performance was significant; ② the profit level of manganese dioxide products increased dramatically; ③ the investment income increased significantly over the same period last year. 2023Q1 achieved revenue of 660 million yuan (yoy -12.7%) and net profit of 0.6 billion yuan (yoy -8.5%), which is expected to be mainly affected by rising raw material procurement costs and declining investment returns (yoy -38.6%).

The testing business continues to grow at a high rate. Looking at it by sector, the company's electronic components and testing business has achieved good development. In 2022, the company's electronic components revenue reached 660 million yuan (YOY +14.7%), accounting for 23.8%. The industrial raw materials business reached 850 million yuan (YOY -10.6%), accounting for 30.9%. Metal products reached 4.2 billion yuan (yoy -4.8%), accounting for 15.1%. Testing reached 570 million yuan (YOY +26.4%), accounting for 20.6%.

Net interest rates have increased dramatically, and expenses have been properly managed. The consolidated gross profit margin for 2022 was 23.7% (yoy+1.0pct), and the net interest rate for the same period was 15.5% (yoy+6.2pct). In terms of gross margin, the testing business rose sharply, achieving 56.6% (yoy+7.1pct); industrial raw materials/electronic components achieved 14.8%/10.4% (yoy+4.0pct/-6.5pct); and metal products achieved a gross profit margin of 21.0% (yoy-6.8pct). The sales expense ratio in 2021 was 2.0% (+0.9pct), mainly due to an increase in the company's revenue; the management expense ratio was 5.7% (+0.2pct); and the financial expense ratio was 0% (-0.4pct), mainly due to an increase in interest income raised during the reporting period and a decrease in interest expenses after repayment of bank loans. R&D expenses rate 5.5% (-0.3pct). Net operating cash flow was achieved of 170 million yuan, an increase of 29.1% over the previous year, mainly due to government subsidies received in 2022 and a year-on-year increase in deferred income.

With Baowu taking the lead, the magnetic materials business is expected to benefit the core. In December 2022, China Steel Group was officially incorporated into Baowu as a whole. Baowu indirectly held 32.9% of the company through China Steel Group. Baowu is the world's largest steel company. As the magnetic materials business platform of Baowu Group, the company has 55,000 tons of manganese tetroxide/20,000 tons of permanent magnet ferrite devices/5,000 tons of soft magnetic parts/2,000 tons of rare earth permanent magnetic parts/70,000 tons of metal products. It is expected to be deeply integrated into Baowu's “one base five yuan” business plan, sharing excellent management mechanisms, management methods, scientific and technological achievements and capital, and benefiting from the background of major shareholders to obtain upstream resource endowments and become first-tier magnetic material suppliers. The internal integration process is worth looking forward to.

Profit forecast: Net profit attributable to the mother for 23-25 is estimated to be 46/ 57/72 million yuan respectively, the corresponding EPS is 0.61/0.75/ 095 million yuan, and the corresponding PE is 15.4/12.6/10.0x. 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.