The cessation of cobalt prices and the rebound led to a significant improvement in the company's 23Q2 performance over the previous month. The steady profit in the copper business combined with the expansion of production capacity provided the company's performance support. As the precursor production line is completed and put into operation, the company is expected to expand its smelting side advantages to the field of lithium battery new energy materials manufacturing. We predict that the company's net profit from 2023-2025 will be 419/941/1,188 million yuan, giving the company 1.6 times the PB valuation in 2023, corresponding to a target price of 47 yuan, and maintaining a “buy” rating.

The company's Q2 performance improved significantly, and cash flow and asset structure continued to improve. In the first half of 2023, the company achieved operating income of 2,452 billion yuan, a year-on-year decrease of 8.8%, and realized net profit of 81 million yuan, a year-on-year decrease of 85.5%. Among them, net profit for the second quarter was 73 million yuan, a year-on-year decrease of 19.6%, and a year-on-year increase of 810%. As cobalt prices stopped falling and rebounded in the second quarter, the company's profitability recovered markedly. As of the end of the second quarter of 2023, the company's cash flow from operating activities was 340 million yuan, a significant improvement from the same period last year and the end of 2022; the company's balance ratio was only 11.96%, which is at a low level in the industry. Benefiting from a better balance and liability structure, the company's financial expenses for the first half of the year were -70 million yuan.

Asset impairment is dragging down performance, and cobalt prices have bottomed out and the company's profitability is expected to pick up. In the first half of 2023, the company calculated asset impairment losses of 155 million yuan, mainly due to falling inventory prices and contract performance cost impairment losses caused by falling cobalt prices. The average domestic cobalt price in the first half of 2023 was 288,000 yuan/ton, down 44% from the previous year and 17% from the average price in the second half of 2022. As the decline in cobalt prices slowed, the asset impairment losses calculated by the company showed a trend of narrowing quarterly. Since June 2023, the price of cobalt has bottomed out and rebounded. We judge that the current price of cobalt has fallen to the bottom range, and it may be expected to run steadily in the future. It is expected that stopping the fall in cobalt prices will effectively improve the profitability of the company's cobalt products.

The company's copper and cobalt production increased significantly in the first half of the year, and the profit of the copper business remained steady. According to the company's disclosure, in 2023, the company plans to achieve the production and sales target of 16,600 tons of cobalt products and 40,000 tons of copper products. In the first half of the year, the production and sales volume of the company's copper and cobalt products achieved a significant increase in production and sales. The company's copper products achieved gross profit of 377 million yuan in the first half of 2023, close to the gross profit of the copper business for the whole of 2022; gross margin was 29.7%, up 6.5 pct from 2022. The company's copper production capacity in the Democratic Republic of the Congo (DRC) continues to expand, and the overall plan is to reach 60,000 tons/year. The copper business is expected to provide steady performance support for the company.

The production expansion project is progressing smoothly, and the company's precursor business is worth looking forward to. According to the company announcement, as of June 30, 2023, the company's fund-raising project had newly put 13,500 tons of cobalt, 10,000 tons of nickel, and 15,000 tons of battery waste into comprehensive recycling. The production capacity of the company's cobalt products had increased to 20,000 tons/year, and the scale advantage was further expanded. Construction of the company's planned 40,000-ton ternary precursor and 10,000-ton cobalt tetroxide projects began in December 2022. The first phase of the 20,000 ton ternary cobalt tetroxide production line and the 50,000-ton cobalt tetroxide production line is scheduled to be tested by the end of 2023. After the production line mentioned above is put into operation, the company will expand the product line and extend the industrial chain, and expand the advantages of the traditional cobalt-nickel smelting business to the field of manufacturing new energy materials for lithium batteries.

Risk factors: the risk of a sharp drop in the prices of products such as cobalt and copper; the company's capacity expansion progress falls short of expectations; the risk that the company's business expansion falls short of expectations due to increased competition in the ternary precursor industry.

Profit forecasts, valuations and ratings: Affected by falling cobalt prices, the company's performance has been under pressure since the second quarter of 2022. As the price of cobalt falls to the bottom, the company's performance has rebounded month-on-month, and the expansion of the scale of cobalt copper products and the imminent commissioning of the precursor business are all expected to drive continuous improvement in the company's performance. Considering the impact of the sharp drop in cobalt prices on the company's performance, we lowered the company's net profit forecast for 2023/24 to 419.941 million yuan (the original forecast was 2145/2,712 billion yuan), and added the forecast value for 2025 to 1,188 million yuan. Considering that company profits in the industry are highly volatile due to falling cobalt prices, and the referential nature of PE valuations has weakened, using the PB valuation method, Huayou Cobalt, Hanrui Cobalt, and Luoyang Molybdenum were selected as comparable companies. The average PB forecast for the above companies in 2023 (Wind unanimous expectation) is 2.0 times. Given that the company's precursor business is still in the construction period and profit volatility is high, the company was given a moderate discount based on the industry average, and the company was given 1.6 times the PB valuation in 2023. The corresponding target price was 47 yuan, maintaining the company's “buy” rating.