Key points of investment:
Event: The company released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved revenue of 3.106 billion yuan, -2.0% year-on-year; net profit of 126 million yuan, -65.9%; net profit after deducting non-return net profit of 123 million yuan, -66.1% year-on-year. On a quarterly basis, 23Q3 achieved revenue of 979 million yuan, +1.2%/+51.6% over the same period; net profit of 80 million yuan, +26.6%/+210.5% over the same period; net profit after deducting non-return net profit of 80 million yuan, +27.9%/+230.1% over the same period.
Rare earth prices have recovered month-on-month, and profitability has improved. According to Baichuan Yingfu data, the average price of praseodymium oxide in 2023Q3 was 486,000 yuan/ton, +0.7%; the average price of dysprosium oxide was 2.39 million yuan/ton, +16.6%; and the average price of zinc oxide was 7.741 million yuan/ton, -9.9% month-on-month. The price of rare earths has been rising steadily, and the company's profitability has been repaired. The net profit margin for Q3 sales was 8.25%, +3.64pct over the previous month.
Ganghwa's rare earth injection enhances the company's potential. The Ganghwa Rare Earth Mine is the mining project with the largest single ionic rare earth mining index in the country. 1) Resource side: V5 ore preservation blocks are not being considered yet. As of the evaluation base date, the recoverable reserves are 12.99 million tons, rare earth oxides are 14,171 tons, and the ammonium salt and magnesium salt process is expected to be mined until 2028. 2) Selection: The approved annual production of rare earth oxides (100% REO) is 2,384 tons, of which the ammonium salt index is 1,840 tons, which is already fully produced; the magnesium salt index is 544 tons, but the plan is raised to 1,000 tons. Coordinated indicators within the China Rare Earth Group have been added, and production is scheduled to begin in 25 years, with an estimated production of 500/1,000 tons in 25/26. 3) Separation: The separation capacity of 5,000 tons of Xinghua New Materials has obtained an EIA and is still awaiting energy evaluation. It is expected that within 23 years of trial operation, the separation capacity will be greatly increased.
In 2023, the light rare earth index of the China Rare Earth Group increased again. The rare earth mining index for the full year of 2023 was 240,000 tons, +14.3% year-on-year, of which the light rare earth index was 221,000 tons, +15.7% year-on-year, and the heavy rare earth index was 192,000 tons. There was no change for 6 consecutive years. In 2023, China Rare Earth Group received a light rare earth index of 54,200 tons, accounting for 24.5% of the total index, +50,000 tons/ +10.2% over the previous year; it received a heavy rare earth index of 13,000 tons, accounting for 67.9% of the total index. As the only listing platform under the China Rare Earth Group, the company is expected to continue to benefit from the continuous injection of the Group's high-quality rare earth assets.
Profit forecast and investment advice: Due to price fluctuations of rare earth products, we have changed our assumptions about the rare earth metal business. We have not considered Jianghua rare earth injection for the time being. We adjusted the company's net profit from 2023-2025 to 2.26/4.03/495 million yuan (originally 2.51/4.02/491 million yuan in 23-25), taking into account its nearly three-year history of PE 105.9 times, giving the company a 90-fold PE valuation in 2024. The corresponding market value is 36.3 billion yuan, and the target stock price is 36.97 yuan, maintaining the “buy” rating.
Risk warning: injection projects fell short of expectations; downstream demand fell short of expectations; growth in rare earth indicators exceeded expectations.