Incident: The company released the first quarter report of 2023. In 2023Q1, it achieved operating income of 79.17 million yuan, a decrease of 23.66% over the previous year; realized net profit of 16.3863 million yuan, a decrease of 39.28% over the previous year; and realized net profit of 14.4078 million yuan after deducting non-return to the mother, a year-on-year decrease of 31.53%.

Comment:

The decline in the sales price of atomized alloy powder dragged down the company's performance. The company's revenue from carbonyl iron powder and soft magnetic powder was stable. 2023Q1's revenue fell 23.66% year-on-year and 5.51% month-on-month to 79.17 million yuan mainly due to macro-consumption conditions. Although sales of atomized alloy powder increased, the shift in sales prices of downstream products from high-end high prices to low low-end prices led to a decline in sales revenue of 2.37 million yuan year-on-year. However, atomized alloy powder is a “processing fee” pricing model, and the company's overall gross margin increased by 1.35 pct to 37.22% over the same period last year. In addition, due to factors such as increased expenses during travel and other periods and reduced non-recurring income such as government subsidies, the company's net profit returned to the mother in 2023Q1 fell 39.28% year on year and 16.35% month on month to 163863 million yuan. Net interest rate fell 6.04 pct year on year and 2.72 pct on month to 20.72% month on month.

The production capacity of carbonyl iron powder is planned to expand further, and the cost reduction process opens up market space. The company plans to invest an additional investment to build a “100,000 tons of soft metal nanopowder project with an annual output of 100,000 tons” on the basis of the “innovative process to produce 3,000 tons of carbonyl iron powder per year” to form a production capacity of 100,000 tons of metal soft magnetic nanopowder series products and 250,000 tons of high-priced metal by-products per year. The project is operated by Yuean, Ningxia, and is divided into three phases. The company plans to start construction in the third quarter of this year. The total construction period of the project is 36 months. The company expects the release of additional production capacity from 2024-2029 to 0.05, 0.25, 1, 1.7, 30,000 and 40,000 tons, respectively. The project uses an innovative process — using recycled materials, minerals, etc. with higher impurity content to replace the original process of high-purity iron to reduce raw material costs while enriching high-value metal by-products. Additionally, the project site was selected as Ningdong Industrial Park in Ningxia, where local coal chemical companies can provide high-purity and low-cost carbon monoxide. Supported by lower raw material costs and energy costs, the company is expected to reduce the sales price of carbonyl iron powder to around 20,000 yuan/ton on the premise of maintaining a gross margin of 40% or more. The company expects to fully achieve annual sales revenue of 3.423 billion yuan and net profit of about 593 million yuan after delivery. The new production capacity mainly serves the middle and downstream sectors that are more price sensitive. The company plans to distribute the consumption ratio of new production capacity in the fields of precision structural components and electronic components to be 1:1.

For alternative and new markets, the production capacity of the company's fund-raising projects is expected to be consumed in an orderly manner. Compared with other iron-based milling processes, the company's carbonyl iron powder products have the three characteristics of fine grain size, good sphericity, and high purity. If precision structural parts are made, the density is higher and the mechanical properties are better; if the components are manufactured, they are more energy efficient and easier to miniaturize and integrate in medium- and high-frequency application scenarios such as servers, GPUs, automotive electronics, etc. The company's new production capacity targets alternative and incremental demand. First, it is expected to replace traditional materials such as electrolytic iron powder (current average price is 20,000 yuan/ton, annual market space 150,000 tons), cast iron, etc., and is expected to achieve new sales volume of about 15,000 tons/year in tool applications and structural parts applications; secondly, carbonyl iron has small particles, and the electronic components made have low loss and high saturated magnetic induction strength at medium to high frequency operating frequencies, so it is expected to be used in high frequency power such as consumer electronics, automotive electronic power, high computing power supply modules, etc. An additional sales volume of approximately 56,000 tons/year was achieved in the application scenario.

Profit forecast and investment rating: Considering the orderly deployment of 6,000 tons of carbonyl iron powder and 4,000 tons of atomized alloy powder at the company's Dayu base, and the orderly construction of the company's future production capacity of 100,000 tons of soft magnetic nanopowder in Ningxia, we expect the company's net profit to return to the mother in 2023-2025 to be 1.36, 187, 248 million yuan respectively, and EPS is 1.59, 2.19, 2.91 yuan/share respectively. PE corresponding to the current stock price is 27x, 20x, 15x, maintaining the company's “buy” rating.

Risk factors: The construction of the company's atomized alloy powder project and carbonyl iron powder project fell short of expectations; the company's 100,000 ton carbonyl iron powder construction project and downstream customer expansion fell short of expectations; demand in the downstream electronic components and precision parts industry fell short of expectations.