According to the company's announcement, the estimated net profit for 2023 is 6-72 billion yuan, an increase of about 967%-1181% from the previous year's statutory disclosure data, and an increase of about 23%-48% over the profit after the same period last year. The company's net profit for 2023Q1-3 is $531 million, and the estimated profit for Q4 is 0.69-189 million yuan.

Profit in 2023 exceeded expectations: The large increase in profit was mainly due to the company's acquisition of 100.00% of the shares of the actual controller, Shuikoushan Co., Ltd., and 20.8333% of Hunan Zhuye Nonferrous Metals Co., Ltd. According to the interim report, in 2023, H1 Shuikoushan Limited's net profit was 260 million yuan, and the company's net profit to mother was 370 million yuan.

We estimate that the large increase in the price of gold and silver is the main reason why profits have exceeded expectations. The average prices of lead, zinc, gold and silver in 2023 were 15,759 yuan/ton, 21,646 yuan/ton, 450 yuan/gram, and 5,535 yuan/kg, respectively, down 14%, 3%, 15%, and 18% respectively from 2022.

The Shuikoushan Kangjiawan technical improvement project began testing: According to the company's WeChat account, on December 26, 2023, the Kangjiawan mine technology upgrading project was jointly tested. After the Kangjiawan mining area reached production, the production scale increased from 550,000 tons/year to 700,000 tons/year. Currently, the Shuikoushan lead-zinc mine is the main contributor to the company's profit, and its scale expansion has helped the company grow.

The company's extrinsic endogenous growth can be expected. The company's business in 2022 was a single zinc smelting, injected into Shuikoushan in 2023, and the business transformation expanded to lead, zinc, gold and silver polymetallic ore mining and metallurgy. The actual controller, China Minmetals, is an important state-owned enterprise with metal minerals as its core business and is directly managed by the central government.

According to China Minmetals and related reports, it has continuously obtained breakthroughs in prospecting in the depths of old mines such as Kangjiawan, Huangshaping, Yagongtang, Laowangtang, and tin mines. A large lead-zinc mine, a large gold mine, a large silver mine, and a medium-sized copper mine were discovered in the south-central region of China. The Shuikoushan public account also reported new breakthroughs in prospecting and won the 2023 Outstanding Contribution Award from China Minmetals Group Co., Ltd. The expansion of the company's extrinsic endogenous resources can be expected.

Profit and valuation: As the Kangjiawan mining section is undergoing a 700,000 tons/year technical improvement project, profits are expected to continue to rise in 2024-2025. Without considering price fluctuations, the 2024 lead-zinc gold and silver prices use the year-to-date average price. We estimate the net profit for 2024 of 790 million yuan, which corresponds to a price-earnings ratio of 11 times. The company's main products are lead, zinc, gold, silver, indium, germanium, etc., which is 15 times the company's average price-earnings ratio in 2024. Maintain a “Highly Recommended” rating.

Risk warning: Risk of sharp drop in prices of zinc, lead, gold, silver, sulfuric acid, indium, etc., risk of asset expansion falling short of expectations, risk of production safety, risk of exchange rate fluctuations, risk of secondary market fluctuations, etc.