Affected by the market demand for products such as rare earth magnetic materials, the performance has declined slightly. According to the third quarter report of 2023, the company realized revenue of 2.07 billion yuan (yoy-0.9%) and net profit of 250 million yuan (yoy-11.8%) in the first three quarters of 2023. In a single quarter, 2023Q3 realized revenue of 660 million yuan (yoy+0.7%) and net profit of 80 million yuan (yoy-6.5%). The main reason for the decline in the company's performance is that the profitability of the participating company has declined compared with the same period last year, and the company's investment income has decreased (40 million yuan less than the same period last year); some of the company's rare earth permanent magnets, fluorenone and other products have been affected by market demand, and their performance declined compared with the same period last year.

Steady improvement in profitability and proper cost control. The company achieved a gross profit margin of 26.1% (yoy+1.7pct) in the first three quarters of 2023, compared with a net profit margin of 13.7% (yoy-1.1pct) for the same period. The company achieved a sales expense rate of 2.7% (+ 0.9pct) in the first three quarters of 2023, mainly due to a slight increase in product sales, accelerated market development and increased sales staff; the management expense rate achieved 5.6% (+ 0.2pct); the financial expense rate reached-0.1% (- 0.1pct), mainly due to the increase in interest income; and the R & D expense rate reached 4.9% (- 1.2pct). In the first three quarters, the net operating cash flow was-80 million yuan, a year-on-year decrease of 20 million yuan.

Scientific and technological innovation leads the development, and the testing business is making steady progress. 1) the company has a total of 362 R & D personnel, 12 of whom enjoy the special allowance of the State Council, and have academician workstations and national enterprise postdoctoral workstations. The company has 588 patents, including 152 invention patents, which will continue to carry out technological innovation around the current and future needs of the country and the market. 2) the company's inspection and testing industry has set up 34 offices in various provinces and cities throughout the country, forming a strong testing service network, with a testing scale covering the whole country, professional testing services, advanced equipment and authoritative reporting. At the same time, the main body of the intelligent inspection building newly built in 2020 has been completed, and the intelligent information construction of the building is being carried out. After the completion of the project, the whole testing process will be more intelligent, automated and mechanized, and effectively improve the company's inspection capacity and efficiency.

Benefiting from Baowu, the growth of magnetic materials business is expected. At present, the company has a production capacity of 50,000 tons of electronic grade manganese tetroxide / 15000 tons of battery grade manganese tetroxide / 20,000 tons of permanent magnet ferrite devices / 8000 tons of soft magnetic devices and powders / 2000 tons of rare earth permanent magnet devices / 70,000 tons of metal products. benefiting from the growth in demand for new manganese materials, the company plans to expand the production capacity of 10,000 tons of battery poles. In July 2023, the reorganization of Baowu and Sinosteel has gone through the industrial and commercial change registration, Baowu through the Sinosteel indirect holding company 32.9%. As the magnetic material business platform of Baowu Group, the company is expected to deeply integrate into Baowu's "one-base and five-yuan" business plan, share excellent operating mechanisms, management means, scientific and technological achievements and funds, and benefit from the background of major shareholders to obtain upstream resource endowments. To become a first-line magnetic material supplier, the internal integration process is worth looking forward to.

Profit forecast: from 2023 to 2025, it is estimated that the revenue will be 28.3 / 395 × 4.78 billion yuan, and the net profit of the parent company will be 4.1 billion yuan, corresponding to a PE of 15.5 pound 12.4 × 9.8x. The company testing business incentive system is good, magnetic materials business to enjoy the growth of the industry, the future is expected to maintain high revenue, profit growth, maintain the "buy" rating.

Risk tips: magnetic materials downstream demand growth is lower than expected, testing business expansion is not as expected, raw material price fluctuation risk and so on.