Incident: The company recently released its three-quarter report for 2023. In Q1-3 of 2023, the company achieved revenue of 3.97 billion yuan, a year-on-year increase of 8.66%, net profit to mother of 241 million yuan, a year-on-year decrease of 42.90%, after deducting non-return net profit of 237 million yuan, a year-on-year decrease of 39.55%. Looking at a single quarter, Q3 achieved revenue of 1,520 billion yuan, a year-on-year increase of 57.09%, and a month-on-month increase of 12.20%; net profit to mother was 160 million yuan, which turned a loss into a profit over the previous year, with a 120% increase over the previous year, with a significant improvement in performance.

Performance analysis: Product structure optimization, inventory impairment has come to an end, and performance improvement trends or determination. Product structure optimization: In the first half of 2023, the company's copper product revenue grew rapidly. It is expected that cobalt products will continue to maintain this trend in the 3rd quarter, and copper products may contribute significantly to the company's first three quarters; in terms of price, cobalt sulfate, cobalt chloride, and LME copper prices in the 3rd quarter changed by -33.4%, -34.1%, and 8.8%, respectively, +9.7%, +4.4%, and -0.9%. Cobalt prices improved month-on-month, and the company's revenue is expected to develop positively. Profitability has rebounded and the impact of impairment has weakened: The decline in the company's profit is mainly due to a decrease in the company's gross margin and a decrease in gross profit. 2023Q3's gross margin has rebounded to 21.55%, and profitability has continued to improve since Q3 of 2022; in the first three quarters, the company calculated impairment losses of 210 million yuan, accounting for 61.8% of total profit before tax, but Q3 only accrued asset impairment losses of 47.85 million yuan in a single quarter, which remained flat in Q2. Compared with the second half of '22 and the first quarter of '23, a drop of more than 50%, risks have been fully released. Profit suppression factors have been mitigated, and profits are expected to continue to improve. Appropriate fee control, low balance ratio, and significant cash flow improvement: in Q1-3 2023, the company's management, sales, and financial expenses accounted for 0.1%, 3.5%, and -2.3% of revenue, respectively. The three expenses accounted for the company's new low. The sales expenses rate and management expense ratio remained stable. Negative financial expenses were mainly interest income and exchange income from the company's sufficient cash. The first three quarters achieved revenue of 604.38 million yuan, and the cost control was excellent; as of 2023Q3, the company's balance ratio was only 12%, and the risk on the debt side was low; Q1-3 in 2023, the company Net operating cash flow reached the highest level in history of 489 million, a marked improvement. Overall, the company operates steadily, has strong resilience to risks, and can safely overcome industry troughs.

Future highlights: Production capacity continues to expand, copper-cobalt two-wheel drive, future growth can be expected. The company's two production bases at home and abroad are expanding production, laying out natural resources and secondary resources, and production capacity continues to expand. According to the long-term plan, the overseas Democratic Republic of the Congo (DRC) cobalt-copper smelter will eventually form 10,000 tons of cobalt, 60,000 tons of copper, 200,000 tons of sulfuric acid, 16,500 tons of liquid sulfur dioxide, 45,000 tons of alkali sulfide, and 21MW/H power generation; the domestic market will eventually form 46,000 metal tons of cobalt products, 20,000 tons of manganese products, 20,000 tons of lithium carbonate, 120,000 tons of precursors and 20,000 tons of cobalt tetroxide. Currently, the company is investing in construction in an orderly manner. The company is expected to form a new pattern of copper-cobalt two-wheel drive, collaborative development of natural resources and secondary resources, and future growth can be expected.

Investment advice: The company is one of the leading producers of cobalt salt. Performance has improved month-on-month, and profits are expected to continue to grow after the planned production capacity is released. We expect to achieve net profit of 3.97/7.91/11.36 billion yuan in 2023-2025, respectively. Based on the closing price of October 31, 2023, the corresponding PE is 30/15/10 times, respectively, covered for the first time, giving it a “careful recommendation” rating.

Risk warning: Production capacity release falls short of expectations, risk of demand falling short of expectations, risk of overseas operations, exchange rate risk.