Event: On October 23, 2023, the company released its 2023 three-quarter report. In Q1-3 of 2023, the company achieved revenue of 24.923 billion yuan, a year-on-year decrease of 11%; net profit of 1.38 billion yuan, a year-on-year decrease of 70.2%; net profit of non-attributable income of 1,335 billion yuan, a year-on-year decrease of 71.3%. In 2023Q3, the company achieved revenue of 8.44 billion yuan, up 7.3% year on year and 16.4% month on month; net profit of 324 million yuan, down 78.4% year on year and 142% month on month; net profit of non-return net profit of 320 million yuan was reduced by 80% year on year and 153% month on month. The results fell slightly short of our expectations.

The sharp year-on-year decline in the company's 2023Q1-3 profit was mainly due to a sharp drop in the price of rare earth products, a year-on-year increase in costs, and a year-on-year decrease of 5.04 billion yuan in gross profit. Looking at a single quarter, the sharp increase in Q3 net profit was mainly due to a sharp drop in Q3 costs month-on-month, and the cost reduction exceeded the drop in product sales prices. ① Sales volume:

2023Q1-3's sales volume of rare earth oxides, rare earth metals, and magnetic materials increased by -12.7%/+31.7%/+30.0% year-on-year to 171/2.16/34,800 tons, respectively. Looking at a single quarter, 2023Q3, the company's sales volume of rare earth oxides, rare earth metals, and magnetic materials was 0.68/0.79/13,800 tons, respectively, up 63.5%/51.6%/63.4% year-on-year, and 41.0%/14.6%/25.5% over the previous year. ② Price: Due to weak demand, compounded by the rapid growth rate of the first batch of domestic indicators in 2023, and Myanmar's import volume increased dramatically after customs clearance resumed, and there was excess supply and demand. Rare earth prices fell sharply year-on-year in the first three quarters. The listing prices of 2023Q1-3 neodymium oxide and praseodymium metal were 553/679,000 yuan/ton, respectively, down 30.5%/30.0% from the previous year. The listing prices of 2023Q3 neodymium praseodymium/praseodymium metal were 472/583,000 yuan/ton, respectively, down 37.4%/36.7% year on year and 13.0%/12.7% month on month. ③ Cost: The agreed price of Q1-3 rare earth concentrate increased 7.3% year-on-year to 28,840 yuan/ton.

Looking at a single quarter, the agreed price of Q3 rare earth concentrate decreased 35% month-on-month and 25% year-on-year to 20176 yuan/ton.

④ Impairment loss: Q3 asset impairment decreased by 154 million yuan month-on-month, mainly due to stable rare earth prices in Q3, and a sharp improvement in inventory impairment in Q3.

Core highlights: ① The North has a stable position as a leader in light rare earths, and indicators continue to grow. The second batch of rare earth mining and separation indicators for 2023 has been issued. The company's mineral products and separation product indicators are 85707 and 7,8831 tons respectively, up 5.2% and 4.9% year-on-year. The company's mining and separation indicators for the full year of 2023 increased by 17.6% and 18.1%, respectively. Huamei Company, a wholly-owned subsidiary of the company, has invested in the construction of a green smelting and upgrading project. The project has started and completed the EIA and energy review. Preliminary work is progressing steadily. After completion, it has the capacity to process 58.09% REO mixed rare earth concentrate of 198,000 tons/year, with an REO of 115,000 tons/year, and the additional production capacity of the project is guaranteed. ② As the price of rare earths falls, the cost side gradually declines. The agreed price of 2023Q4 rare earth concentrate was only 20,536 yuan/ton, up 1.8% from the previous month and down 29.2% from the previous year.

Investment advice: The company's production and sales volume continues to grow. As a leader in rare earths, it is expected to benefit from a rebound in rare earth prices at the bottom. We expect the company's net profit to be 18.72, 28.99, and 3.367 billion yuan in 2023-2025, EPS of 0.52/0.80/0.93 yuan respectively, and PE corresponding to the closing price on October 23 to 39, 25, and 21 times, respectively, maintaining the “recommended” rating.

Risk warning: Prices of rare earth concentrates have risen, rare earth prices have dropped sharply, production capacity has been released less than expected, etc.