Core views

1. The company's net profit to the mother in 2022 was 381 million yuan, a decrease of 55.22%. The net profit of the company to the mother in 2023Q1 was 74 million yuan, a decrease of 50.46%. This is mainly due to the sharp decline in the profit volume of the aluminum alloy ingot business.

2. The prices of domestic scrap aluminum raw materials and aluminum alloy ingots were reversed. The capacity utilization rate and production margin of the company's Taicang plant were low in 2022, and the company's Taicang plant suspended production in 2023, reducing the erosion of overall profits.

3. The Malaysian project is progressing steadily. The first phase with a production capacity of 650,000 tons is expected to be put into operation in the second half of 2023. The raw material procurement network will be expanded to guarantee the supply of raw materials, the market share of new energy vehicle customers will be expanded, and the added value of the product is expected to increase. With a steady increase in profit, the company's profitability is expected to increase dramatically.

occurrences

The company released the report for the first quarter of 2023

The company's net profit attributable to the parent company in the first quarter of 2023 was $74 million, a year-on-year decrease of 50.46%. Net profit after deducting non-recurring profit and loss attributable to the parent company for the first quarter of 2023 was $70 million, down 51.75% from the previous year.

The company released its 2022 annual report

The company's net profit attributable to the parent company in 2022 was 381 million yuan, a year-on-year decrease of 55.22%. Net profit after deducting non-recurring profit and loss attributable to the parent company in 2022 was $363 million, down 57.29% year over year.

Brief review

1. Aluminum alloy ingot business: net profit declined due to a sharp decline in volume profit

Volume: In 2022, the company produced 245,900 tons of aluminum alloy ingots, a decrease of 15%; sales volume was 248,400 tons, a decrease of 14%. The main factors are: 1) Domestic industrial policy adjustments forced the company to cancel incoming material processing. At the same time, domestic raw material prices remained high, and the overall capacity utilization rate of the Taicang plant in 2022 was low; 2) In order to ensure that the market could operate at full capacity in the later stages of market recovery, the company chose to repair the production line during the market downturn.

Profit: In 2022, the price of the company's aluminum alloy ingots was 17,700 yuan (+13%), the tonne cost was 16,600 yuan (+26%), and the gross profit per ton was 1,661 yuan (-44%). Affected by macroeconomics, the price of scrap aluminum, the main raw material of the company's products, rose sharply year on year, leading to a year-on-year decline in the gross margin of the company's products.

2. Production at the Taicang base has been suspended, and personnel have been deployed to support the successful commissioning of the Malaysian project to implement the import standards for scrap aluminum, and the import of recycled aluminum raw materials by domestic enterprises has been blocked and the shortage has intensified. At the same time, domestic aluminum scrap has not yet reached the large-scale scrapping period, and the number of new domestic aluminum scrap is limited in the short term. The price of scrap aluminum remains high, and domestic aluminum scrap raw materials and aluminum alloy ingots are being inverted, leading to a decline in the production capacity utilization rate of the company's domestic base. Combined with the downturn in the global economy, market demand for aluminum alloy ingots shrank. In 2022, the company's Taicang plant's aluminum alloy ingot production margin was seriously low. At one point, there was a negative value. In 2023, the company decided to suspend production at the Taicang plant, thereby reducing the erosion of the Taicang plant on the company's overall profits.

After the Taicang plant was shut down, the company retained the original operation team, met the existing business needs of the Taicang plant through the group's aluminum ingot method, and continued to develop the domestic aluminum alloy ingot market. Furthermore, the company will uniformly arrange for some technicians to support Malaysia's expansion of the aluminum alloy ingot project with an annual output of 1.3 million tons to ensure the smooth release of production capacity in the first phase of the project.

3. The Malaysian project is progressing steadily. The first phase with a production capacity of 650,000 tons is expected to be put into operation in the second half of 2023. In order to make full use of its multinational business advantages, Malaysia's labor and energy cost advantages, and convenient transportation advantages, the company decided to expand the aluminum alloy ingot project with an annual output of 1.3 million tons in Malaysia. At present, the project is progressing in an orderly manner according to the plan. Some civil engineering works have been completed, related supporting production equipment has also been put in place one after another, and the deployment and training of procurement, production and sales personnel is also being carried out in an orderly manner according to the established plan. It is expected that all infrastructure construction and the first phase of production capacity of 650,000 tons will be completed in the second half of 2023. In recent years, the transformation and upgrading of the domestic industrial structure has accelerated the emigration of traditional manufacturing industries. The demand for aluminum alloy ingots in developing countries, mainly in Southeast Asia, is increasing, but domestic aluminum ingot export tariffs are high. It is expected that after the Malay project is produced, the company will release more international markets.

4. Expand the raw material procurement network and expand the market share of new energy vehicle customers downwards. The company continues to promote the strategic plan for laying out the entire scrap vehicle recycling industry chain of “waste vehicle recycling - dismantling - resource recycling - automobile supply chain”. At present, it has established an international raw material procurement and product sales system.

On the upstream side, the company continues to optimize foreign procurement channels and continue to deploy upstream in the industrial chain. On the one hand, it plans to build new procurement offices in Southeast Asia, Europe, Japan and other places to actively continue to improve the raw material procurement network. On the other hand, it continues to expand M's procurement radius through new construction, mergers and acquisitions, etc., to further increase market share. At the same time, it makes full use of the advantages of vertical integration of upstream and downstream materials to increase control over foreign raw material procurement prices and provide a more solid guarantee for the company's profits.

On the downstream side, the company has become a supplier to many world-renowned automobile manufacturers, electrical and electronics manufacturers and their joint ventures or wholly-owned enterprises in China. The supply relationship between the company and downstream customers is stable. The main thing is that slight differences in the composition and physical properties of aluminum alloy ingots of the same grade may cause differences in the qualification rate or yield of customer products, which has a certain degree of customer stickiness. Since traditional fuel vehicle companies currently account for a relatively high proportion of downstream automobile customers for the company's main product, aluminum alloy ingots, the company will adapt to the development of the times, develop and expand cooperation opportunities with NEV manufacturers, increase investment in product R&D to meet the needs of NEV customers, and expand the market share of NEV customers. At present, cooperation has been established with Ningbo Xusheng, Quanfeng Automobile and other companies.

5. Actively deploy heat-insulating die-cast aluminum alloy ingot technology. The added value of the product is expected to enhance the rapid development of the domestic NEV industry in recent years. In order to meet the technical upgrade needs of downstream customers, the company has set up a heat-insulating die-cast aluminum alloy ingot R&D task team, and has discussed and exchanged views with well-known universities, research institutes and industry associations many times. Unlike mainstream research on the market using raw aluminum as the main material for heat-insulating integrated die-cast aluminum, the company confirmed the technical route to develop heat-free cast aluminum alloys using recycled aluminum raw materials and completed the testing and verification of the technical route. This route strives to break the technical barriers of existing integrated die-casting heat-free treatment for cast aluminum alloy materials. It is expected that with the release of heat-insulating alloy products, the added value of the company's products is expected to increase dramatically.

6. Waste recycling trade business: The new investment in an automatic metal sorting system is expected to increase the company's waste metal processing capacity. The company's scrap metal mainly comes from household waste, industrial waste products and scrap cars. The downstream market area is dominated by the US. To meet the demand for raw materials, the company has built more than 20 recycling points in the US, distributed across five continents in the eastern US. The recycling radius is broad, there are high industry barriers, and the industry is a mature market in the US. The industry penetration rate is high and performance stability is strong. In the field of scrap metal recycling and trade, relying on the advantages of technology, geography and scale, Metalico has established long-term and stable cooperative relationships with many steel companies in the industry, and has become one of the main suppliers of US steel monopoly giants such as REPUBLIC STEEL and MULTIMETCO INC.

Volume: The company's waste recycling trade business is located in the United States. Affected by the local economy, the company's waste recycling trade business sold a total of 5612,000 tons of ferrous metals (-14.4%) and 42,800 tons of non-ferrous metals (-4.6%) in 2022. The decline in recycling volume led to a decline in the company's overall profit.

Profit: In 2022, the company's waste recycling trade business was priced at 0.47 million yuan (+4%), the tonne cost was 0.42 million yuan (+9%), and the gross profit per ton was 500 yuan (-27%).

New project: Company M invested in an automatic metal sorting system. The construction period of the project was one and a half years. The investment in this equipment can increase M's raw material processing capacity, reduce raw material loss, increase the recycling rate of scrap aluminum, and also save freight costs for inter-company transfers. At the same time, Company M has upgraded the lifting equipment, improving production efficiency and saving the company's maintenance costs. With the gradual improvement of the company's treatment efficiency, the company will continue to expand the recycling radius and increase the amount of scrap metal recycled.

Investment advice: The company's net profit from 2023-2025 is estimated to be 481 million yuan, 843 million yuan and 1,095 million yuan respectively. Corresponding to the current stock price PE is 14.0, 8.0 and 6.1 times, respectively. Considering the company's position and growth in the recycled aluminum industry, the company is given a “buy” rating.

Risk analysis

1. The global economy has declined sharply, and demand for aluminum alloy ingots has shrunk in a cliff-style manner; the IMF of the International Monetary Fund predicts the global economic growth rate of 2023 to be 2.8% in the “World Economic Outlook Report” on April 11, which is 0.1% lower than its forecast for January this year; it expects the economic growth rate of about 90% of developed economies to slow in 2023. The average growth rate of advanced economies is expected to be 1.3% in 2023 and 1.4% in 2024. Economic data from Europe and the US have shown a downward trend, and falling into a deep recession will curb aluminum consumption.

2. Risk of fluctuations in product and raw material prices; the main raw material of the company's main product, aluminum alloy ingots, is scrap aluminum. The raw material cost of scrap aluminum accounts for a high proportion of the company's main business costs. Most of the scrap aluminum is priced based on the amount of metal contained in it, and prices fluctuate with changes in metal prices in the international market. Although fluctuations in the price of aluminum alloy ingots and the price of raw materials have little impact on the company's profits in the long term, in the short term, due to time differences and delays in the price of finished products and the price of raw materials, it will have a certain impact on the company's profits.

3. The commissioning of the new project falls short of the anticipated risk; the Malaysian aluminum alloy ingot project with an annual output of 1.3 million tons has now completed some civil engineering works, related supporting production equipment has also been put in place one after another, and the procurement, production and sales staff deployment and training work is being carried out in an orderly manner according to the established plan. If the progress of the new construction project falls short of expectations, it may lead to an increase in project investment and the company's performance falling short of capital market expectations.