1H23 performance fell short of our expectations
The company announced 1H23 results: operating income of 2,686 million yuan, -16.2% year-on-year; net profit from the same period -187 million yuan, -177.8% year-on-year. 2Q23 achieved operating income of 1,255 million yuan, -37.4% year-on-year, -12.2% month-on-month; net profit to parent - 206 million yuan, -223.7% year-on-year, and -1186.9% month-on-month. As prices of rare earths and magnetic materials fell beyond expectations, the company's performance fell short of our expectations.
Prices of rare earth magnets fell, and inventory was prepared for asset impairment, which led to a sharp decline in the company's performance. First, supply and demand in the 1H23 rare earth magnet industry are relaxed, and the price of rare earth magnets continues to decline. According to Asia Metal Network, the average price of 1H23 praseodymium oxide is -40%, the average price of 2Q23 praseodymium oxide is -47%/-27%; 1H23 NdFeB 50H is -29%, and 2Q23 NdFeB 50H is -36%/-20%. Second, prices of raw materials and magnetic materials declined, which led 1H23 to prepare 172 million yuan for asset impairment, an increase of 128 million yuan over the previous year; 2Q23 calculated 166 million yuan, an increase of 118 million yuan over the previous year, an increase of 116 million yuan over the previous year, an increase of 159 million yuan over the previous year.
Focusing on the three major fields of new energy vehicles, consumer electronics, and industrial applications, the NEV magnetic materials business has achieved continuous growth. According to the announcement, the company 1H23 achieved sales revenue of 927/51/948 million yuan in magnetic materials in the three fields of new energy vehicles, consumer electronics, and industrial applications, respectively, +54%/-46%/-14% over the previous year.
Development trends
Deeply involved in the rare earth magnetic materials market, we have achieved steady expansion of production capacity with strong technical strength and high-quality customer resources. According to the announcement, the company is one of the first domestic enterprises to enter the sintered NdFeB magnet industry. Its product applications cover major domestic new energy vehicle brands, and it is the main magnet supplier for global intelligent 3C electronics giants. In terms of capacity expansion, according to the announcement, the company has now developed a production capacity of 21,000 tons of high-performance NdFeB per year, and Baotou's 15,000-ton high-performance rare earth permanent magnet intelligent manufacturing project is being implemented as planned.
Waiting for downstream demand to recover and the peak season to arrive, the company's performance is expected to improve. 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, electronics, home appliances, etc., and that the accelerated implementation of robot applications will add another boost to demand for rare earth permanent magnets. Combined with 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 the high-end magnetic materials industry, the company is expected to enjoy high industry barriers, smooth cost transmission, and is expected to achieve a double boom in production and sales and inventory revaluation, and usher in an inflection point in performance.
Profit forecasting and valuation
Due to the decline in the price of rare earth magnets, we lowered our 2023/2024 net profit by 14.4%/15.4% to 32.438 million yuan. The current stock price corresponds to 25.4/18.7 times the price-earnings ratio of 2023/2024. Maintaining a neutral rating, due to short-term pressure on the company's performance, the target price was lowered by 15.3% to 8.66 yuan, corresponding to the price-earnings ratio of 30/22 times 2023/2024, which has 17.8% upward space compared to the current stock price.
risks
Downstream demand fell short of expectations, and capacity expansion fell short of expectations.