Matters:

Hailiang Co., Ltd. released its semi-annual report for 2023. In the first half of 2023, the company achieved sales volume of 444,500 tons of non-ferrous metal processing products such as copper and copper alloys, with operating income of 43.699 billion yuan, an increase of 14.87% over the previous year; realized net profit attributable to shareholders of listed companies was 717 million yuan, an increase of 10.08% over the previous year; and achieved non-net profit attributable to shareholders of listed companies of 858 million yuan, an increase of 522% over the previous year.

Commentary:

Exchange rate fluctuations in the second quarter disrupted the company's non-recurring profit and loss. According to the company's convertible bond tracking and rating report, as of the end of March 2023, the company had 22 production bases worldwide, with a total production capacity of 1,256 million tons/year for copper processing. Among them, overseas copper processing production capacity was distributed in Vietnam, Thailand, the United States, Germany, Spain, Italy, France, etc., totaling 463,000 tons, accounting for 36.86% of the company's total production capacity. The central price of RMB against the US dollar fell from 6.8717 to 7.2258 in the second quarter, and the US dollar appreciated 5.15% against the RMB. The company confirmed a total investment income of about 4.29 million yuan in the first half of 2023, of which 44.21 million yuan for the first quarter and -39.92 million yuan for the second quarter. The investment income included investment income calculated using the equity method for associated companies, investment income from disposal of foreign exchange derivative financial instruments, and acceptance bill discount expenses. Exchange rate fluctuations had a certain impact on the company's exchange-rate hedged financial derivatives; net income from fair value changes - 187.9 million yuan, mainly due to changes in fair value from foreign exchange transactions.

The second quarter entered the peak downstream sales season. Production and sales volume increased 20.6% month-on-month and gross profit increased 17.94% month-on-month.

According to SMM research, since the end of February 2023, the copper pipe industry's order performance has been improving, mainly due to air conditioning pipe orders being driven by air conditioning pipe orders: three years after the epidemic, air conditioning companies are working hard. In the context of high temperature expectations, air conditioning companies have very strong production schedules after February, and the operating rate of copper pipes has continued to rise. Some companies said that production was full from the end of February to May, and the SMM copper pipe operating rate remained around 90% in April and May.

Hailiang Co., Ltd. achieved sales volume of 444,500 tons in the first half of the year, with sales volume of 201,500 tons in the first quarter and 243,000 tons in the second quarter, an increase of 20.6% over the previous quarter. The gross profit also increased from 796 million yuan in the first quarter to 939 million yuan, an increase of 17.94% over the previous quarter.

The Gansu lithium battery copper foil project was put into operation at the end of last year. Since this year, the production and sales volume of lithium battery copper foil has increased month by month. In the first half of the year, on the one hand, Hailiang Co., Ltd. accelerated the construction process of a high-performance copper foil material project with an annual output of 150,000 tons in Lanzhou, Gansu, to achieve continuous production of high-performance lithium battery copper foil, and a rapid increase in production, order volume and shipment volume; on the other hand, focusing on market demand, increasing investment in R&D, overcoming technologies such as high resistance and high ductility, new products were introduced to meet customer needs; the company now has a large-scale mass production capacity of 4.5-9 micron copper foil. It has rapidly grown into leading enterprises in the power battery and energy storage industry to achieve batch supply, product orders and shipments. According to the convertible bond tracking and rating report, Hailiang Co., Ltd. achieved sales of 0.1 million tons of copper foil in 2022 and 0.06 million tons of copper foil in the first quarter of this year, but processing costs showed a downward trend. The company's processing fees in 2022 were between 2.5-50,000 yuan/ton, and processing fees fell to 150,000 yuan/ton in the first quarter of 2023.

Investment suggestions: We believe that Hailiang Co., Ltd. on the one hand has mastered industry-leading copper tube production technology, and at the same time benefits from obvious scale effects. It is expected that the copper tube industry will achieve strong strength and achieve greater scale and lower costs through systematic technical reform. We expect Hailiang Co., Ltd.'s net profit for 2023-2025 to be 1,666/22.80/2,665 billion yuan (the previous profit forecast for 2023-2024 was 1,742 billion yuan and 2,660 billion yuan. The reason for the slight reduction is a correction in the level of optimism about overseas demand), an increase of 37.9%, 36.9%, and 16.9% over the previous year. The industry average valuation was selected as 13.6 times the company's reasonable valuation. The corresponding market value in 2024 was 31 billion yuan, and the target price was 15.58 yuan. There is a 31% margin compared to the current market value and stock price, and a “recommended” rating is given.

Risk warning: (1) the risk of an overseas recession; (2) the growth of the new energy industry seriously fell short of expectations; (3) the recovery of domestic real estate fell short of expectations.