Key points of investment:
Event: The company released its semi-annual report for 2023. 23H1 achieved revenue of 2.127 billion yuan, or -3.36% of the same period; net profit of 45 million yuan, or -85.13% of the same period; and the company's accrued inventory impairment of 195 million yuan. On a quarterly basis, 23Q2 achieved revenue of 646 million yuan, -34.93%/-56.37% of the same period; net profit of return to the mother was 26 million yuan, -81.08%/+32.72% of the same period.
The price of rare earths fell, and the company's performance was under pressure, but it improved from 22H2. 1) Price: The price of 23H1 praseodymium oxide was 573,000 yuan/ton, -40.1% year-on-year. Among them, the price of Q2 was 482,000 yuan, -47.1%/-27.4% over the same period. The price of the company's products continued to decline. 2) Profit: The gross margin of H1's split business was 15.81 pct, -8 pct year on year, compared to 22h2+4.85 pct. Profitability improved.
Jianghua rare earth injection is awaiting a decision by the China Securities Regulatory Commission, and the company's rare earth resources and production capacity are expected to be further increased. 1) Resource side: Not considering V5 ore protection blocks for the time being. As of the evaluation reference date, the recoverable reserves were 12.99 million tons, and 14,171 tons of rare earth oxides. Ammonium salt and magnesium salt processes are expected to be mined until 2028.
2) Selection: The approved annual production of rare earth oxide (100% REO) is 2,384 tons, of which the ammonium salt target is 1,840 tons, which is already fully produced; the magnesium salt target is 544 tons, but the plan is to increase it to 1,000 tons. The China Rare Earth Group can coordinate and supplement the indicators. The plan is to start production in '25, with an estimated output of 500/1,000 tons in 25/26. 3) Incineration: The current mineral product ignition production capacity has reached 3000 tons. 4) Separation: The separation capacity of 5,000 tons of Xinghua New Materials has received an EIA and is still awaiting energy evaluation. It is expected to be tested within 23 years, while China's rare earths set the separation target for South Dahua and Guangzhou Jianfeng in '22 to be 4111 tons. The separation production capacity will be greatly increased. It is estimated that the oxide output is 351/3680/4825/4825 tons in 23-26.
Performance commitments and profit compensation agreements are signed, and performance contributions are guaranteed. Minmetals Rare Earth Group signed a performance commitment and profit compensation agreement with the company. If it is delivered in 23 years, it guarantees a cumulative 3-year deduction of non-net profit to reach the predicted mining rights caliber. If delivery is completed in 24 years, it will be postponed for 1 year. At the same time, a one-time cash compensation will be given if the requirements are not met. The predicted net profit for mining rights in 23-26 will be 2.4/1.6/17/190 million yuan respectively.
Profit forecast and investment suggestions: Due to price fluctuations of rare earth products and preparations for inventory price reduction, we lowered the company's performance and did not consider Jianghua rare earth injection for the time being. We adjusted the company's net profit for 2023-2025 to 251/402/491 million yuan (originally 427/453/100 million yuan in 23-25), taking into account 98.2 times its historical PE average value for the past three years, giving the company 90 times PE in 2024. The corresponding market value is 36.2 billion yuan, and the target stock price is 3688 yuan, maintaining the “buy” rating.
Risk warning: injection projects fell short of expectations; downstream demand fell short of expectations; growth in rare earth indicators exceeded expectations.