Incident: Zhenghai Magnetic Materials disclosed the 2023 semi-annual report. In the first half of 2023, the company achieved operating income of 3.158 billion yuan, an increase of 14.63% over the previous year; achieved net profit attributable to shareholders of listed companies of 241 million yuan, an increase of 16.75% over the previous year; and achieved net profit of 234 million yuan deducted from non-net profit, an increase of 18.37% over the previous year. Among them, revenue for 2023Q2 was 1,782 million yuan, up 5.44% year on year, and 29.49% month on month; net profit of return mother was 123 million yuan, up 0.57% year on year, and 4.97% month on month.

Performance continued to improve in the first half of the year. 1) Revenue: 2023H1 achieved revenue of 3.148 billion yuan, up 14.63% year on year, of which Q2 achieved revenue of 1,782 billion yuan, up 5.44% year on year and 29.49% month on month, mainly due to the increase in the company's sales volume. 2) Profit: 2023H1's gross profit margin was 17.33%, +2.73 pct; of these, Q2 gross margin was 16.68%, up 3.82 pct year on year, and decreased 1.49 pct from month to month. The month-on-month decrease in gross margin was mainly due to lower sales prices of the company's products and a rise in production capacity at the Nantong factory due to falling rare earth prices. Furthermore, due to the decline in rare earth prices, the company calculated an asset impairment loss of 29 million yuan. The company's performance in the first half of the year continued to grow despite the downward trend in rare earth prices. Looking back, with the arrival of the traditional peak season in the magnetic materials industry and the gradual stabilization of rare earth prices, the company's performance is expected to continue to recover.

The amount of losses in the electric drive business of new energy vehicles in Ogun narrowed sharply year on year. 2023H1 Ogun Corporation achieved revenue of 44 million yuan, an increase of 204% over the previous year. Due to market factors, it was still not possible to achieve profit, but losses narrowed sharply year on year, with losses of 13 million yuan in the first half of the year, 23 million yuan in the same period last year, a decrease of 0.1 billion yuan over the same period last year.

The company's automotive sector accounts for nearly 70% of revenue, of which energy-saving and new energy vehicles account for about 50%. The automotive sector is the company's largest application area. The company's average coverage of TOP10 international automobile brands, TOP5 independent car brands, and TOP5 new car-building brands has reached 90%; the coverage rate of TOP5 automotive electrification brands such as global EPS is 100%.

2023H1's automobile market shipments increased 36% year on year, completed 1.96 million motor magnet sets for energy efficient and new energy vehicles, up 50% year on year, and the company's automotive sector revenue accounted for nearly 70%, of which energy-saving and new energy vehicles accounted for about 50%; in the air conditioning sector, the company achieved 100% coverage of the top 5 global inverter air conditioning compressor brands; in the field of wind power, the company achieved 100% coverage of the TOP5 global wind turbine brands (the double feed technology route does not use permanent magnets).

Production capacity is gradually being released, with a long-term planned annual production capacity of 36,000 tons. The company currently has three NdFeB permanent magnet production bases: Yantai East-West Plant, Fuhai Plant and Nantong. Currently, it has a NdFeB production capacity of 24,000 tons (East-West factory area 10,000 tons, Fuhai factory area 8000 tons, Nantong base 6,000 tons), with a long-term planned total production capacity of 36,000 tons/year; of these, the total planned production capacity of the Nantong base is 18,000 tons, and another 12,000 tons of production capacity will be gradually implemented according to the company's business development situation.

Profit forecast and investment suggestions: Assuming the NdFeB magnetic blank sales volume in 23/24/25 was 20000/26000/32,000 tons, and the NdFeB rough sales price was 35/36/370,000 yuan/ton, respectively; the company's net profit for 23/24/25 is estimated to be 550/819/1,073 million yuan respectively (the profit forecast for 23/24/25 in the 23/24/25 report on March 28, 2023 was 596/893/1,059 million yuan, respectively). The current stock price corresponds to the 23/24/25 PE valuation of 17x/11x/9x. Overall, maintain the “buy” rating.

Risk warning events: Fluctuations in prices of main products, fluctuations in raw material costs, changes in industrial policies, project progress falling short of expectations, demand falling short of expectations, demand measurement deviations, and risks of delays in the use of public information in research reports, etc.