1H20 performance is in line with our expectations

The company announced 1H20 results: operating revenue of 290 million yuan, down 2.2% from the same period last year; net profit of 75.72 million yuan, an increase of 5.1% over the same period last year, which is in line with our expectations. Of this total, 2Q20's operating income is 150 million yuan, year-on-year / month-on-month + 5.2% / month-on-month + 5.2% / month-on-month + 10.0%, return-to-home net profit of 40.89 million yuan, year-on-year / month-on-month + 17.2% / month-on-month + 17.4%. The performance improved significantly in the second quarter.

Cost-controlled gross margins rose, and 1H20's net profit rose 5.1 per cent year-on-year. 1H20's revenue fell 2.2% from a year earlier, mainly due to a decline in sales of automotive magnets. From a business point of view, the amount of new orders for bonded NdFeB magnets / hot-pressed NdFeB magnets / samarium cobalt magnets is + 3.4% less than the same period last year. 226.1% Murray 26.2%. The company's overall gross profit margin rose by 2.8ppt to 37.3%, which has become a major factor in catalytic performance growth.

The expense rate of 1H20 during the period was 5.2%, which decreased by 0.3ppt compared with the same period last year, of which the sales / management / R & D / financial expense rate was 2.8%, 2.3% and 4.3%, respectively, which was the same as the same period last year and + 0.2/+1.1/-1.6ppt, respectively. The decline in financial expense rate was mainly due to the increase in interest income and exchange earnings.

Stable operation and production, low asset-liability ratio. As of 2Q20, the asset-liability ratio is only 4.6%, and the balance sheet continues a sound trend. In terms of cash flow, 1H20 operating activities had a net inflow of 73 million yuan, an increase of 43.1% over the same period last year, mainly due to a decrease in projects payable over the same period last year; capital expenditure was 26.17 million yuan, an increase of 42.9% over the same period last year.

Trend of development

The new project is about to start to expand the company's hot-pressed NdFeB and samarium cobalt production capacity. At present, the company has an annual production capacity of 300x200 tons of hot-pressed NdFeB magnet / samarium cobalt magnet. Silver Magnetic Materials, a wholly-owned subsidiary established by the company in 2017, is preparing to start production and operation and will expand the company's annual production capacity of 1000 / 500 tons of hot-pressed NdFeB magnets / samarium cobalt magnets to create a profit growth point for the company.

Downstream industry warming overlay technology upgrading catalysis, bonded NdFeB magnet business is expected to benefit.

The company's main products are bonded NdFeB magnets, which are mainly used in micro-motors and sensors of medium-and high-grade cars. On the one hand, the automobile industry has warmed up after the epidemic. According to the China Automobile Association, China's automobile production has increased for four consecutive months compared with the same period last year, while the output of new energy vehicles also returned to year-on-year growth in July. On the other hand, with the improvement of automation and energy saving, the number of magnets needed in automobile motors will gradually increase.

Profit forecast and valuation

We maintain our profit forecast of $1.4 million for 2021. The current share price corresponds to the 2020 38.4x/31.4x price-to-earnings ratio of 2021. Based on the steady growth of 1H20 and the pick-up trend of downstream industries, we raise our target price by 20.7% to 18.10 yuan and maintain a neutral rating, corresponding to a price-to-earnings ratio of 34.0x in 2021, which is 8.1% higher than the current stock price.

Risk

The progress of the project is not as expected, and the price of upstream rare earth raw materials fluctuates.