The company is a world-class R&D, production and supply enterprise for rare earths and related products. The rare earth business has formed a relatively complete industrial chain from mineral processing, smelting and separation to deep processing, and has achieved a dual domestic and foreign layout. Based on expectations of tightening supply and demand for rare earths in the future, we expect rare earth prices to rise in the future, compounding expectations of a rapid increase in the company's production. The company's net profit from 2023-2025 is estimated to be 2.40/6.66/858 billion yuan respectively. Referring to the valuation levels of comparable companies, the company was given a PE valuation of 36 times in 2024, corresponding to the target price of 14 yuan, covering and giving it a “buy” rating for the first time.

Company Overview: World-class R&D, production and supply enterprise for rare earth and related products. The company has a strategic layout at home and abroad and adheres to a diversified raw material supply strategy. The rare earth business has formed a complete industrial chain from mineral processing, smelting and separation to deep processing. Affected by factors such as price fluctuations of rare earth raw materials and weakening consumption expectations, in the first three quarters of 2023, the company achieved operating income of 13.107 billion yuan, an increase of 1.77% over the previous year, and realized net profit of 158 million yuan, a year-on-year decrease of 89.35%.

Industry analysis: rare earth supply is diversified, and downstream demand is booming. China's rare earth resource reserves and production rank first in the world, and domestic supply mainly comes from national quotas. As supply from Australia, the US, and Myanmar continues to increase, China's share of global rare earth ore supply has declined from 98% in 2010 to 70% in 2022, according to USGS data. Looking at the medium to long term, the tight supply and demand pattern in the rare earth market has not changed. We expect the global rare earth supply and demand gap to be 9.2/4.0/-2.0/- 143,000 tons in 2023/2024/2025/2030, respectively. Combining the supply and demand situation, the rare earth market shows a short-term oversupply trend and continued tightening in the medium to long term.

The global layout of the company's resources. The company has three sources of raw materials in China, namely the procurement of rare earth mines in mainland Sichuan, the Yangfanggou Rare Earth Mine, which has a stake in Mianli Rare Earth, and the Weishan Lake Rare Earth Mine of Shandong Steel Research. Outside of China, it participated in the US MP company and underwrote its major rare earth products such as rare earth concentrates. The Mountain Pass mine produced 42,500 tons of rare earth oxides in 2022. In addition, the ETM company's Kvanefjeld project, in which the company is a shareholder, can produce 30,000 tons of rare earth oxides every year and has not yet obtained a mining license; Peak's Ngualla project can produce 37,200 tons of rare earth concentrate (45% REO) per year. Peak expects to start production in 2026, which is expected to greatly enhance the company's raw material-side capabilities.

Zirconium-titanium business linkage, monazite enhances raw material security. Monazite is a by-product of the production of zircon, ilmenite, and rutile, etc., and its praseodymium content is generally 23%. Monazite contains radioactive elements and requires high processing qualifications. The company began laying out the monazite industry chain in 2015. Through cooperation with China Nuclear Power, it has acquired enterprises such as Wensheng in Hainan and Hengyang Valley Road, and has formed a complete industrial chain for the import, processing and processing of monazite resources.

Currently, the company can process 2 million tons/year of raw materials for seaside sand, with an annual output of about 30,000 tons of monazite, corresponding to nearly 4,000 tons of praseodymium oxide, further enhancing raw material security capabilities.

The company realizes the layout of the entire rare earth industry chain. The company has formed an industrial layout of rare earth mining, smelting and separation, and metal processing at home and abroad through holding acquisitions, equity participation, and cooperation. By the end of 2022, the company had a smelting and separation capacity of 30,000 tons and a metal processing capacity of 27,000 tons. According to the company's 2023-2025 development plan, the company expects that by 2025, the guarantee and smelting and separation capacity of various rare earth resources will reach more than 60,000 tons/year, rare earth metal processing capacity will reach 30,000 tons/year, and the comprehensive recycling capacity of rare earth waste will reach 10,000 tons/year. In addition, the company participated in a project with an annual output of 20,000 tons of high-performance NdFeB permanent magnet materials, further extending the industrial chain layout.

Risk factors: risk of rare earth prices exceeding expectations; risk of rare earth supply exceeding expectations; risk of downstream demand falling short of expectations; risk of company expansion plans falling short of expectations; risk of foreign policy changes; risk of changes in overseas policies; risk of memorandums of understanding failure.

Profit forecast, valuation and rating: The company is a world-class R&D, production and supply enterprise for rare earth and related products. The rare earth business has formed a complete industrial chain from mineral processing, smelting and separation to deep processing, achieving a dual domestic and foreign layout. Affected by the sharp decline in rare earth prices since 2023, the company's profit has declined. Based on expectations of tightening rare earth supply and demand, we expect rare earth prices to rise in the future, compounded by the rapid rise in the company's production. The company's net profit for 2023-2025 is expected to be 2.40/6.66/858 million yuan, corresponding to the EPS forecast of 0.14/0.38/0.49 yuan, respectively. We selected enterprises that also have a layout in the rare earth industry chain, Northern Rare Earth, Guangsheng Nonferrous, and China Rare Earth as comparable companies. Currently, the average PE value under Wind's consensus forecast for 2023-2025 is 71/36/28x, and considering that the company's production is expected to increase significantly, we gave the company a PE valuation of 36 times in 2024, corresponding to the target price of 14 yuan, covering the first time and giving it a “buy” rating.