Core views:
Net profit for 23Q2 dropped 91.5% month-on-month, and the performance was in line with expectations. The company disclosed the 2023 mid-year report. 23H1 achieved net profit of 83.98 million yuan, down 93.77% year on year. Among them, Leshan Shenghe and Chenguang Rare Earth 23H1 achieved net profit of 516.9 million yuan and 30.8 million yuan respectively; Q2 achieved revenue of 3.75 billion yuan, down 15.1% year on year and 21.8% month on month; net profit of 6.6 million yuan, down 99.0% year on year and 91.5% month on month; net cash flow from operating activities - 191 million yuan, down 137.5% year on year, down 27.3% year on year; balance ratio 34.5%, up 0.04 PCT from the previous year, down 1.00 PCT from the beginning of the year. Overall performance was in line with expectations.
The production expansion plan is progressing steadily, and we look forward to the completion and commissioning of the Peak project. According to the quarterly production and operation data disclosed by the company, the company produced 35,000 tons of rare earth products in 23Q2, an increase of 114% over the previous year and an increase of 7% over the previous year. According to the company's announcement that its subsidiary Peak (19.8% of the company's shareholding ratio) obtained a mining license, the Ngualla rare earth mining project obtained a special mining license during the period. According to Peak's official website, the project has a design capacity of 16,200 tons of REO, and is expected to be put into operation at 25M9. During the period, the company formulated the “23-25 Development Plan”. By 25, various rare earth resource security and smelting and separation, rare earth metal processing, and rare earth waste recycling capacity had reached more than 60,000 tons/year, 30,000 tons/year, and 10,000 tons/year, respectively. Currently, related projects are progressing steadily.
Profit forecasts and investment recommendations. It is estimated that the company's EPS for 23-25 will be 0.16/0.27/0.45 yuan/share, respectively, and the PE corresponding to the closing price on September 1 will be 70.2/41.7/25.2 times, respectively. In the context of carbon neutrality, downstream demand for rare earth magnets is resilient. Domestic upstream mining and smelting and separation are facing bottlenecks in production capacity, and rare earth prices may rise steadily. Expected improvements will bring opportunities for valuation repairs to the company. Considering that the company's overseas upstream rare earth resource layout continues to improve, combined with the PB valuation situation of comparable companies, we think it is reasonable to give the company a 23-year PB valuation of 2.5 times. The corresponding reasonable value of the company is 13.59 yuan/share, giving the company a “buy” rating.
Risk warning. Demand falling short of expectations poses a risk of falling rare earth prices; risk of overseas project development and operation; risk of exchange rate fluctuations; risk of domestic rare earth indicators and related policies exceeding expectations.