1H23 performance is slightly lower than we expected.
The company announced 1H23 results: operating income 4.304 billion yuan, year-on-year-8.5%; return to the mother net profit of 163 million yuan,-59.9% year-on-year. 2Q23's operating income was 2.089 billion yuan,-17.9% year-on-year,-5.7% month-on-month, and the net profit returned to its mother was 62 million yuan,-74.3% year-on-year and-39.2% month-on-month. The company's performance was slightly lower than we expected, mainly due to a higher-than-expected drop in the prices of rare earths and rare earth magnets.
The decline in the price of rare earth magnetic materials + impairment provision + contraction of investment income led to a sharp decline in the company's performance. First, the supply and demand of 1H23 rare earth magnetic materials industry is loose, and the price of rare earth magnetic materials continues to decline. Take NdFeB 50H as an example, according to Asia Metal Network, the average price of 1H23 NdFeB 50H is 320,000 yuan / ton, compared with-29%, 2Q23, NdFeB 50H is 290,000 yuan / ton, and the same / ring ratio is-36% and 20%. Second, the price of rare earth raw materials has continued to decline, resulting in an impairment loss of 69 million yuan in 1H23's assets, an increase of 42 million yuan over the same period last year; and 37 million yuan in 2Q23, an increase of 10 million yuan over the same period last year and 5 million yuan from the previous year. Third, the investment income of 1H23 is-22 million yuan, a decrease of 24 million yuan compared with the same period last year; the investment income of 2Q23 company is-24 million yuan, a decrease of 16 million yuan over the same period last year and 26 million yuan from the previous year.
Trend of development
Deep ploughing rare earth magnetic materials market, with strong technical advantages and stable customer base to achieve steady expansion of production capacity. According to the announcement, the company is one of the earliest enterprises engaged in the research and production of NdFeB in China, and has been deeply ploughing the market of rare earth magnetic materials for many years, and its technical research and development and industrialization promotion have always kept pace with Japanese magnetic materials enterprises. end customers cover well-known enterprises in the fields of new energy vehicles, consumer electronics, industrial motors, etc., most customers have cooperated with the company for more than 5 years, and some customers have cooperated with the company for more than 15 years. In terms of capacity expansion, according to the company's announcement, as of July this year, the company had planned to use the funds raised and its own funds to expand the production capacity of 10,000 tons of sintered NdFeB. At present, 5000 tons of new capacity has been built, and the existing capacity of sintered NdFeB is 25000 tons. The rest of the capacity will be gradually built according to the actual situation.
Waiting for the recovery of downstream demand and the arrival of the peak season, the company's performance is expected to improve. Looking forward to the second half of 2023, we believe that the consensus on domestic stable growth policies is expected to lead to a recovery of demand in automobile, electronics, home appliances and other areas, superimposed by the arrival of the traditional peak season and a substantial increase in the supply-side margin. rare earth prices are expected to end the bottom period and usher in an upward trend. As a leading enterprise of high-end magnetic materials, the company is expected to enjoy higher industry barriers, cost transmission is more smooth, is expected to achieve production and marketing and inventory revaluation, ushered in the performance inflection point.
Profit forecast and valuation
Due to the fact that the company's previous high-priced inventory led to higher-than-expected asset impairment losses and lower gross profit, we lowered 2023 Universe's 2024 net profit by 20.9% and 13.0% to 4.53 trillion yuan. The current share price corresponds to the price-to-earnings ratio of 30max 2024. To maintain a neutral rating, due to the short-term pressure on the company's performance, we lowered our target price by 13% to 12.95 yuan, corresponding to a price-to-earnings ratio of 34.8 times earnings for 2023 Compact in 2024, which is 15.7% higher than the current share price.
Risk
Downstream demand is lower than expected and capacity release is not as expected.