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On October 23, Shenhuo released its performance report that revenue in the first three quarters of 2023 was 28.629 billion yuan, down 10.91 percent from the same period last year; net profit from home was 4.103 billion yuan, down 29.94 percent from the same period last year; and basic earnings per share was 1.83 yuan, down 30.15 percent from the same period last year. Of this total, revenue in the third quarter was 9.52 billion yuan, down 9.22% from the same period last year and 0.78% from the previous year; the net profit belonging to shareholders of listed companies was 1.363 billion yuan, up 3.14% from the same period last year and 14.25% from the previous year.

Comments:

In the third quarter, Yunnan Shenhuo resumed production smoothly, Yunnan electrolytic aluminum production was released, and Yunnan minority equity acquisition was completed.

According to the summary of investor research, after two production cuts in September 2022 and March 2023, Yunnan Shenhuo started to resume production on June 18, 2023, and has achieved full production in nearly two months. taking into account aluminum water filling, raw material consumption and other factors, the start-up cost of electrolytic aluminum tons in Yunnan is about 1000 yuan. The third quarter is the flood season in Yunnan, the electricity cost of Yunnan Shenhuo is the lowest in the whole year, and the profit of electrolytic aluminum is considerable. Yunnan electrolytic aluminum project has many advantages: (1) the advantage of green hydropower, which can use green and pollution-free hydropower as the main energy, which is in line with the overall layout of the construction of ecological civilization in China, and the cost of hydropower is obviously lower than that of thermal power in the flood season. (2) the project is only 120 kilometers away from Baise, the main producing area of alumina, and is close to the South China market where aluminum consumption is the most concentrated, the western market with rapid growth of aluminum consumption potential, and the major consumer countries of aluminum products such as Southeast Asia and South Asia. The location advantage is very obvious. The board of directors of the company approved the acquisition of a 14.85% minority stake in Yunnan Shenhuo on August 18, 2023. By the end of the third quarter of 2023, the company had completed the relevant industrial and commercial change registration procedures. The company's shareholding in Yunnan Shenhuo Aluminum Co., Ltd. has increased from 43.40% to 58.25%, and is expected to achieve more return net profit in the fourth quarter.

Shenlong Baoding renamed Shenhuo new material, spin-off listing and battery aluminum foil project progressed smoothly. The core equipment of Shenlong Baoding Phase I project, such as aluminum foil mill, coiler and roll grinder, all use international first-class imported equipment, the overall installation level has reached the international advanced level, and its leading product is high-precision electronic electrode aluminum foil. widely used in the field of green batteries. At present, Shenlong Baoding has completed the IATF16949 automobile quality management system certification; the second phase of the new energy power battery material project is progressing smoothly, the rolling mill has been installed one after another, and it is expected that all 8 rolling mills will be completed in June 2024. The company's aluminum foil business has been in full production, battery aluminum foil orders are relatively sufficient, especially after June, battery aluminum foil orders have increased rapidly, the current battery aluminum foil has accounted for more than 50%. The company is currently carrying out the business integration of the aluminum processing plate, bringing all the related businesses of the aluminum processing plate into Shenlong Baoding, of which Shenlong Baoding's acquisition of 100% investment rights of Yunnan new materials has been completed. Shanghai aluminum foil acquisition of sunshine aluminum 51% equity related procedures are being processed. At the end of September 2023, according to the needs of business development, the name of Shenlong Baoding Company was changed to Shenhuo New material Technology Co., Ltd.

The balance sheet continued to optimize, and financial expenses fell to negative value in the third quarter. Since the supply-side reform, the company's operating conditions and asset quality have been comprehensively improved. From 2016 to 2022, the company made a total asset impairment of 8.775 billion (mainly including closed electrolytic aluminum production capacity, alumina plants, coal mines, etc.). At present, the asset quality has improved in an all-round way. the cash flow of operating activities reached 7.042 billion yuan in the first three quarters of 2023, and the monetary capital reached 17.988 billion yuan at the end of the third quarter. The asset-liability ratio continued to drop to 63.12%, and the borrowing cost was low, and the interest expense in the third quarter was only 9 million yuan. On the contrary, the interest income is higher than the interest expenses, reaching 84 million yuan, thus reducing the financial expenses to-67 million yuan, indicating the company's relatively good asset quality and debt structure.

Profit forecast and investment advice: the recent decline in the cost of electrolytic aluminum raw materials drives the overall profit level of the industry to pick up; the company is actively expanding the upstream and downstream industrial chain, which is expected to enhance the growth space in the future. We estimate that from 2023 to 2025, the operating income will be 377.74 million yuan (the previous value is 378.57 pounds 40909 million dollars), and the net profit of homing is 56.45 million pounds (the previous value is 5741 million dollars), which is 3.4% compared with the same period last year. Shenhuo shares are divided into two main sectors: coal and electrolytic aluminum. we use segment valuation for the two businesses according to comparable companies, and give them 6 times and 8 times respectively in 2024 according to comparable companies in the same industry. Shenhuo shares have a reasonable market capitalization of 48.4 billion yuan, corresponding to a share price of 21.50 yuan, compared with 34% room at present, to maintain the "recommended" rating.

Risk tips: (1) overseas recession exceeded expectations; (2) domestic economic recovery was lower than expected; (3) the company's coal mine operation encountered administrative interference.