Main points of investment

Performance summary: the company released its semi-annual report for 2023, with revenue of 1.409 billion yuan, year-on-year-1.69%, net profit of 170 million yuan, year-on-year-13.93%, and basic earnings per share of 0.22 yuan, year-on-year-14.91%.

Inspection and testing business performance is outstanding, magnetic materials business affected by downstream demand has declined. The company focuses on manganese-based new materials, magnetic materials, inspection and testing of the three major business sectors, 2023H1 achieved revenue of 1.409 billion yuan, year-on-year-1.69%, gross profit margin of 26.1%, year-on-year + 2.5pct. Among them: (1) industrial raw materials: achieve revenue of 368 million yuan, year-on-year-28.32%, gross profit margin of 14.22%, year-on-year-3.55pct; (2) electronic components: achieve revenue of 335 million yuan, year-on-year-0.38%, gross profit margin of 11.32%, year-on-year + 3.44pct; (3) inspection: revenue of 321 million yuan, year-on-year + 30.39%, gross profit margin of 57.93%, year-on-year + 1.63pct. In terms of business, 23H1's inspection and testing business has increased significantly, and its profitability has been enhanced, accounting for 50% of gross profit; some of the company's rare earth permanent magnets, fluorenone and other products have declined year-on-year due to market demand. In addition, due to the decline in the profitability of the participating companies compared with the same period last year, the company's investment income decreased by 29 million yuan to 17 million yuan. Overall, the company's inspection and testing business performed well, but the magnetic materials business declined under the influence of downstream demand, while the reduction in investment income was superimposed. 2023H1 achieved a net profit of 170 million yuan per year,-13.93% compared with the same period last year.

23Q2's profitability has improved, but its return on investment has declined. 23Q2 achieved a single-quarter revenue of 802 million yuan, year-on-year / month-on-quarter + 9.05% / month-on-month + 9.05% / month-on-month 32.30%, gross profit margin of 29.7%, month-on-month + 8.4pct, profitability has been improved. In addition, the investment income of the company's 22Q2-23Q2 is 0.29, 0.17, 0.64 and 0.10, respectively, and the investment return of 23Q2 is lower than that of the previous month. Overall, the company's profitability improved, but the return on investment decreased. 23Q2 achieved a net profit of 114 million yuan, a year-on-year / month-on-month ratio of-16.19% and 10.18%.

Manganese tetroxide production capacity continues to expand, opening up the performance increment space. At present, the company's production capacity: (1) manganese-based new materials: 65000 tons capacity, including electronic grade manganese trioxide 50000 tons, battery grade manganese trioxide 15000 tons; (2) magnetic materials industry: permanent magnet ferrite devices 20000 tons, soft magnetic devices and powder 8000 tons production capacity, rare earth permanent magnet devices 2000 tons production capacity; (3) metal products industry: 70000 tons production capacity. In terms of production expansion, the company plans to expand the production capacity of 10,000 tons of battery-grade manganese oxide by the end of the third quarter, reaching 25000 tons; at the same time, through reconstruction and expansion, the production capacity of metal cores and powders can reach 5000 tons and 8000 tons respectively in the fourth quarter. In addition, in July, Sinosteel was officially incorporated into Baowu, and Baowu indirectly controlled 32.85% of the company through Sinosteel, becoming the company's indirect controlling shareholder. In the future, the company is expected to form a synergy with Baowu's magnetic materials company.

Profit forecast and investment advice: in the future, with the continuous expansion of manganese tetroxide and magnetic materials production capacity, as well as the development trend of inspection and testing business, the main business is expected to usher in rapid development, performance growth is expected.

We estimate that the company's homing net profit for 2023-2025 will be $579 million, respectively, and EPS will be $0.53, respectively. The closing price on August 30 will correspond to the 2023-2025 PE, which is 15.5 times that of 22.2 shock, maintaining the "overweight" rating.

Risk tips: lower-than-expected risk of downstream demand, fluctuation risk of upstream raw materials, and lower-than-expected schedule of projects under construction.