Event: on December 30, China's rare earths disclosed a preliminary plan for a non-public offering of shares. This non-public offering plans to raise no more than 2.03 billion yuan, of which 1.43 billion yuan will be invested in the acquisition of 94.67% equity in Jianghua rare earths held by Minmetals rare Earth Group, and 600 million yuan will be invested in supplementary liquidity projects. This issue is aimed at no more than 35 specific investors, and the number of shares issued shall be calculated according to the total amount of funds raised in this issue divided by the issue price, which shall not exceed 30% of the total share capital of the company before the issue, that is, no more than about 294 million shares (including capital); the issue price shall not be less than 80 per cent of the average stock trading price for the 20 trading days before the pricing benchmark.

Jianghua rare earth-high quality ionic rare earth resource project. The company issued a non-public offering plan at the end of 2022, intending to invest 1.43 billion yuan to acquire the 94.67% stake in Jianghua rare earths held by Minmetals rare Earth Group. 1) on the resource side, the acquisition of Jianghua rare Earth Mine is the largest single ionic rare earth mining project in the country, and it is the first ionic rare earth mine in the "national green mine pilot unit", which has the only rare earth mining warrant in Hunan Province. the Guposhan mining area it belongs to has reached the scale of large-scale ionic rare earth deposits. And according to the latest resource reserves review and filing, within the scope of the mining license for the first phase of the Guposhan mining area in Jianghua Yao Autonomous County, the rare earth oxide reserves (REO) are 37890 tons, the rare earth grade (REO) is 0.11%, and the design production capacity is 2000 tons REO/ years. 2) at the smelting separation end, Xinghua rare Earth is a wholly owned subsidiary of Jianghua rare Earth engaged in rare earth separation and processing. The company's separation capacity of 5000 tons / year is under construction (the original capacity of 3000 tons of Xinghua rare earths + 1100 tons of red gold rare earths in Ganxian County + 900t of rare earths in Guangzhou Jianfeng Mine), which is expected to be put into production in June 2023.

The core financial indicators of Jianghua rare earth are excellent. As of September 30, 2022, Jianghua rare earths had unaudited assets of 1.132 billion yuan, total liabilities of 291 million yuan, owners' equity of 842 million yuan, and a premium rate of 79% based on an evaluation of 1.51 billion yuan. What is important is that Jianghua rare earths have strong profitability, with unaudited revenues of 440 million yuan and 576 million yuan and net profits of 177 million yuan and 252 million yuan respectively from January to September in 2021 and 2022, with corresponding net profit margins of 40.14% and 43.85% respectively According to the annual sales volume of 2000 tons, the price of Jianghua rare earth oxides per ton from January to September in 2022 is 380,000 yuan / ton, and the net profit per ton is 1682,000 yuan / ton.

In addition, from the valuation point of view, according to the Jianghua rare earth valuation of 1.51 billion yuan, 2022 January-September annualized profit corresponding to PE is only 4.5x.

This acquisition will further improve the layout of the company's rare earth industry chain and enhance the overall profitability. At present, the company's assets are mainly concentrated in the rare earth smelting separation link, and the company will further improve the layout of the rare earth industry chain after the acquisition of Jianghua rare earths. It is estimated that the rare earth separation capacity will reach 12400 tons / year (before the acquisition, the company's separation capacity is 7400 tons / year). The self-sufficiency rate of rare earth resources is about 16%. With the improvement of the self-sufficiency rate of rare earth resources, the company's profitability will be greatly enhanced.

Speed up the reshaping of the supply pattern of the rare earth industry. At present, the assets of large rare earth groups continue to integrate, and the reshaping of rare earth supply pattern is being accelerated. The integration of the supply side is expected to further improve the pricing power of rare earth products. It is worth noting that the rare earth sector has continued to weaken since Q3, reflecting concerns about the sustainability of the demand side. In the future, the domestic economy is expected to gradually repair next year, the superimposed supply-side pattern will be reshaped, and the rare earth price "market bottom" has been seen. Continue to recommend paying attention to the layout opportunities on the left side of the rare earth / permanent magnet plate.

Profit forecast and investment suggestions: the company will gradually improve the layout of the rare earth industry chain, and the profit level is expected to continue to improve. We assume that the average price of praseodymium and neodymium oxide in 2022-2024 is 10 thousand yuan / ton in 85-75-85, dysprosium oxide is 270 million yuan / ton, and terbium oxide is 14.2 million yuan / ton. Excluding the acquired assets, the company's net profit in 2022, 2023, and 2024 is estimated to be 4.33,4.85 and 531 million yuan respectively (the profit forecast reported on November 11, 2022 is 4.33,4.64 and 488 million yuan, respectively). Based on the market capitalization of 34.4 billion on January 3, the corresponding PE is 79.5, 70.9, and 64.8X, respectively, maintaining the "overweight" rating.

Risk prompt events: the acquisition is not as expected, the risk of the fluctuation of product prices on the company's performance, the release of production capacity is not as expected, the industry boom is not as expected, the risk of repeated domestic and foreign outbreaks out of control, the risk of deviation in demand measurement, the risk of information lag or untimely updating of the public data used in the research report, etc.