Event: Zhongke Sanhuan released its semi-annual report for 2023, the company's operating income was 4.304 billion yuan, down 8.50% from the same period last year, and the net profit belonging to shareholders of listed companies was 163 million yuan, down 59.86% from the same period last year. In the second quarter of 2023, the single-quarter net profit was 62 million yuan, down 74.27% from the same period last year and 38.61% from the previous quarter.
Sluggish demand and falling product prices are the main factors leading to the decline in performance. During the reporting period, due to the influence of the overall economy, the growth of new energy vehicles in the main areas downstream of the company slowed, and consumer electronics declined significantly, which led to a downturn in demand for NdFeB products and a drop in product prices (Baichuan Yingfu statistics 23H1 domestic blank sintered NdFeB H35 prices fell 25% year-on-year and 9% month-on-month), dragging down the company's first-half operating income by 9% year-on-year and 14% month-on-month. Although the price of rare earth, the main raw material of the company's products, fell (according to Baichuan Yingfu statistics, the average price of domestic praseodymium and neodymium metal in the first half of 2023 dropped 41% from the same period last year and 18% from the previous year), the company's operating costs fell 5% and 10% in the first half of the year compared with the same period last year. However, the decline in rare earth prices also led to an expansion of asset impairment losses in inventories, which increased by 152% and 563% respectively during the reporting period. Among them, although the company's downstream demand improved in the second quarter, the continuous decline in NdFeB and rare earth prices still reduced the company's 2023Q2 operating income by 6% month-on-month, the operating cost remained basically unchanged, the company's gross profit margin fell 4.95% month-on-month to 12.27%, and asset impairment loss increased by 13%, dragging down the company's 2023Q2 performance by nearly 39%.
Demand is expected to gradually recover, downstream consumption of new bright spots appear. Counter-cyclical regulation is emphasized in China, and stable growth policies are further launched. The domestic economy is expected to gradually pick up in the second half of the year, and the downstream demand for NdFeB such as new energy vehicles, consumer electronics, industrial motors, wind power and household appliances is also expected to improve. In addition, Tesla, Inc. 's introduction of humanoid robot superimposed AI technology will accelerate the development of humanoid robot industry, while domestic ministries such as the Ministry of Industry and Information Technology and local governments such as Beijing and Shandong have recently launched policies to support the development of humanoid robot industry. Neodymium-iron-boron, which has excellent properties such as small size, light weight and strong magnetism, is one of the key materials for humanoid robots. It is estimated that a Tesla, Inc. humanoid robot uses about 3 kilograms of neodymium-iron-boron. Humanoid robots are expected to become a new consumption bright spot in the NdFeB industry. As a leading enterprise of NdFeB in the world, the company is expected to be the first to cut the permanent magnet material application track of humanoid robots.
Investment suggestion: the domestic stable growth policy is expected to support the economic recovery as soon as possible, the operating rate of the industrial chain of new energy vehicle sales is warming up, the development of humanoid robots is in full swing, and the demand and price of rare earth permanent magnets are expected to pick up. The company has a production capacity of 26500 tons of blank NdFeB, which is at the head of the rare earth permanent magnet industry, and is expected to be the first to benefit from the recovery of the industry. The company is expected to return to the parent net profit of 5.37 and 803 million yuan in 2023-2024, corresponding to 25x and 17x PE in 2023-2024, maintaining the "recommended" rating.
Risk tips: 1) downstream demand is lower than expected; 2) rare earth prices have fallen sharply; 3) the company's production expansion is not as expected.