1H23's performance met our expectations

The company announced 1H23 results: operating income of 3.158 billion yuan, +14.6% year on year; net profit of 241 million yuan, +16.8% year on year. 2Q23 achieved operating income of 1,782 million yuan, +5.4% year on year and +29.5% month on month; net profit to parent company 123 million yuan, +0.6% year on year, +5% month on month. The company's performance is in line with our expectations.

The NEV magnetic materials business continued to expand. The year-on-year drop in 1H23 magnet prices was lower than that of raw materials, driving a year-on-year increase in performance. First, according to the announcement, the company has now formed a magnetic materials business in the automotive sector accounting for nearly 70% of revenue (of which energy saving and new energy vehicle magnetic materials business accounts for about 50% of revenue). In a good situation where all other application fields are developing in a balanced manner, 1H23's NdFeB products are equipped with 1.96 million sets of energy-saving and new energy vehicle driving motors, +50% over the same period. Second, according to Asia Metal Network, the average prices of 1H23 NdFeB 50H and praseodymium oxide are -29% and -40%, respectively. Third, the company adopted a “combination of production and procurement with reasonable inventory” procurement model to further calm the impact of large fluctuations in rare earth raw material prices. 1H23 achieved a gross margin of NdFeB magnets and components +2.84 ppt year on year, driving the overall gross margin to +2.7 ppt year on year.

Losses in the motor drive business of new energy vehicles in Shanghai Dajun, a subsidiary of 1H23, have narrowed sharply. According to the announcement, in the face of cost reduction pressure in the NEV industry chain, the subsidiary Shanghai Dajun has further strengthened R&D capabilities in terms of software and hardware, and is actively expanding overseas support and cooperative markets. 1H23's NEV motor drive business achieved revenue of 43.71 million yuan, +204% year-on-year. Affected by market factors, it lost 13.25 million yuan, narrower than the same period last year.

Development trends

Actively promote the expansion of production capacity and continuously improve the coverage rate of heavy rare earth diffusion technology products. First, according to the announcement, the company plans to have a NdFeB blank production capacity of 36,000 tons/year by 2026, corresponding to a CAGR of 10.7% from 2022-2026. Second, the company's R&D insists on being guided by customer needs and continuously upgrades and iterates on core technology. According to the announcement, 1H23 heavy rare earth diffusion technology-related products covered more than 80% of the company's products, an increase of 5ppt over the end of 2022.

Waiting for downstream demand to recover and the peak season to arrive, the company's performance is expected to continue to grow. Looking ahead to the second half of 2023, we believe that a consensus on a steady domestic growth policy is expected to drive demand recovery in automobiles, home appliances, etc., compounded by the arrival of the traditional peak season and the difficulty of a sharp increase in supply-side margins, rare earth prices are expected to end the grinding period and usher in an upward trend. We believe that as a leading enterprise in high-end magnetic materials, the company is expected to enjoy high industry barriers. Under the smooth transmission of costs, booming production and sales is expected to drive continued growth in performance.

Profit forecasting and valuation

The 2023/2024 profit forecast remains unchanged, and the current stock price corresponds to the price-earnings ratio of 19/16 times 2023/2024. Maintaining a neutral rating and a target price of 14.31 yuan, corresponding to the price-earnings ratio of 23.6/19.8 times in 2023/2024, there is 23.9% room for improvement from the current stock price.

risks

Downstream demand fell short of expectations, capacity expansion fell short of expectations, and fluctuations in raw material prices exceeded expectations.