Key points of investment

The three major sectors go hand in hand. The company focuses on the development strategy of “refining mechatronics, strengthening magnetic materials, and improving downstream applications” to achieve that the three business segments of mechatronics, magnetic materials, and rehabilitation equipment go hand in hand. Among them, the subsidiary Lianyi Motor is responsible for the electromechanical sector. The main products include servo motors, planetary gear reducers, etc. Some products have been applied to industrial robots. Ganzhou Dongzhi and Dongyang Dongji are responsible for the magnetic material sector. The main products are NdFeB permanent magnet materials.

The revenue scale is growing steadily, and profitability is affected by fluctuations in the price of rare earth magnets. In 2018-2022, the company's revenue scale increased steadily. Among them, 2021 and 2022 benefited from rising average prices of rare earth magnets and downstream demand, the company's operating income increased by 44.55% and 25.85% year on year, and net profit on the net income increased by 32.62% and 90.91% year on year. By business, in 2022, the company's NdFeB magnets increased by 37.06% over the previous year, driving overall revenue growth. In terms of revenue contribution, the motor business/ motor business/ electric wheelchair and scooter business accounted for 65.95%/20.54%/8.13%, respectively, and the gross profit contribution reached 60.89%/27.30%/10.09% respectively.

Furthermore, the gross margins of the motor series, electric wheelchair and scooter businesses were 24.24%/22.63% respectively, higher than 16.84% of the NdFeB magnet business, showing great potential for growth.

Sales of NdFeB and motors declined in '22, and demand for electric wheelchairs was booming. Production and sales of the company's NdFeB and motor businesses were strong in 2019-2021, with compound annual growth rates of 13.10% and 13.65%. In 2022, due to poor demand in the second half of the year, production and sales volume declined. Electric wheelchairs were affected by the relaxation of public events, and market demand increased. The company increased its sales efforts, and annual sales increased by 38.84%.

Investment suggestions: The company has been deeply involved in the electromechanical and magnetic materials sectors for a long time, and has accumulated strong technology and talents. The products are already partially used in the field of industrial robots. We expect the company to achieve operating income of 48.21/50.17/5.311 billion yuan in 2023/2024/2025, up 1.88%/4.06%/5.85% year-on-year respectively; net profit from the parent market was 2.83/330/390 million yuan, up 9.40%/16.52%/ 18.45%, corresponding to EPS of 0.25/0.29/0.34 yuan, respectively. Based on the closing price of 6.74 yuan on June 26, 2023, the corresponding PE for 2023-2025E was 27.01/23.18/19.57 times, respectively. Covered for the first time, giving it an “increase in holdings” rating.

Risk warning:

Risk of price fluctuations of rare earth magnetic materials, risk of market competition, risk of demand falling short of expectations, risk of international trade risk, risk of exchange rate changes, etc.