Recently, the company released its report for the third quarter of 2023. The company achieved revenue of 4.418 billion yuan in the third quarter, a year-on-year decrease of 30.41%; realized net profit of 64 million yuan, an increase of 154.25% over the previous year; and realized net profit after deducting $57 million, an increase of 86.82% over the previous year. In the first three quarters, the company achieved revenue of 15.562 billion yuan, a year-on-year decrease of 15.30%; realized net profit of 166 million yuan, a year-on-year decrease of 21.65%; and realized net profit after deduction of 114 million yuan, a year-on-year decrease of 49.11%.

Comment:

The decline in rare earth prices caused the company's performance in the first three quarters to decline. In the first three quarters of 2023, the company's gross margin was 2.68%, -1.1 pct; net profit margin was 1.12%, -0.07 pct. Since this year, the growth rate of the global economy has slowed, and demand for new energy vehicles and industrial motors in the downstream of rare earths has been weak. Combined with a situation where the supply of rare earth minerals tends to ease, and both supply and demand are weak, rare earth prices have declined. According to data from the China Rare Earth Industry Association, from January to October 2023, the rare earth price index was 231.12 points, -32.62% compared to the same period last year; the average price of neodymium oxide was 545,300 yuan/ton, -37.10% over the same period last year; and the average price of medium yttrium-rich ore was 242,600 yuan/ton, -30.55% over the same period last year. The decline in the price of rare earth products caused the company's gross margin to decline year on year, causing the company's performance to decline in the first three quarters.

Demand gradually picked up, and the company's gross margin improved month-on-month. In the third quarter, the company's gross sales margin was 2.29%, up 0.39 percentage points from the previous month, mainly due to the gradual recovery in downstream demand in the third quarter, which caused the price of rare earth products to rise month-on-month. In terms of prices, the average prices of yttrium-rich, praseodymium oxide, dysprosium oxide, and zinc oxide in the third quarter were 224,600 yuan/ton, 486,600 yuan/ton, 2,388,700 yuan/ton, and 7.7742 million yuan/ton, respectively, +4.53%, +1.05%, +17.05%, and -9.41%, respectively. As the prices of rare earth products steadily rise, the company's profitability is expected to improve in the future.

Key projects have been put into operation one after another, and a strong chain repair chain continues to advance. In 2023, the company will accelerate the development of various business segments and make every effort to promote the construction process of rare earth mining, rare earth smelting and separation, magnets, trade and tungsten businesses. Combined with the fact that many key projects will be put into operation in 2023, the company's development potential and profit level will enter a new stage. At present, the first batch of trial products of Shengyuan Company has been successfully released. As of September, it has met production conditions on a certain scale, and has received orders from enterprises one after another; Hongling Company has introduced strategic partners to jointly carry out mineral resource development to enhance the competitive strength of the company's tungsten sector, and is currently carrying out preliminary preparations such as mine design; the second phase of the Dongdian Chemical Company project has already laid the foundation in October, and production capacity will double that of before.

Investment suggestions: The company takes industrial restructuring and optimization and upgrading as the main line, horizontally expands project construction in all key links, and vertically extends high-value-added business in the industrial chain. By deepening enterprise reform and paying close attention to management, the company's profitability is expected to improve in the future. The company's 2023-2024 EPS is expected to be 0.87 yuan and 1.37 yuan respectively, and the corresponding PE is 41.00 times and 26.20 times respectively, maintaining the “buy” rating.

Risk warning: (1) risk of macroeconomic fluctuations; (2) risk of downstream demand for rare earths and magnetic materials falling short of expectations; (3) risk of rare earth price fluctuations; (4) risk of project construction progress falling short of expectations; (5) risk of production safety and environmental protection; (6) risk of excess supply side of rare earths.