Matters:

The company released its 2023 annual report. The company achieved full-year operating income of 20.805 billion yuan, -9.01%; net profit to mother of 203 million yuan, -12.45%; net profit after deducting net income of 138 million yuan, -44.08% year on year; including taxes and additional 131 million yuan, +34.1% year on year, financial expenses of 0.69 million yuan, -8.59% year on year; net investment income of 126 million yuan, -17.42% year on year; loss of asset impairment -123 million yuan, year-on-year; operating performance Net cash flow was -477 million yuan.

Commentary:

Affected by falling rare earth prices and trade scale adjustments, the company's annual performance was slightly lower than expected. In 2023, the average price of dysprosium oxide/terbium oxide/praseodymium oxide was 2,326,000 yuan/ton, and 530,000 yuan/ton, respectively, -8%/-33%/-36% compared with last year. Affected by the drop in rare earth product prices, the company's gross margin of industrial products fell 2.49 pct, and commercial revenue fell 11.78% due to the contraction in trade scale. In 2023, the company's asset impairment losses were $123 million, mainly due to inventory depreciation losses (-122 million yuan), which together affected net profit attributable to mother of 100 million yuan. The company's net profit after deduction from mother fell by 44.08%, mainly due to factors such as an increase in government subsidy taxes included in current profit and loss, and an increase in impairment preparations to transfer back accounts receivable that were separately tested for impairment. Among them, the decline in operating costs due to the contraction in the scale of trade, the decline in bank financing interest rates, the decline in financial expenses due to the increase in foreign currency exchange earnings, and the decline in management expenses due to the reduction in managers' remuneration have made up for the company's performance to a certain extent. The company's net operating cash flow was -477 million yuan, mainly due to the expansion of production capacity of separate enterprises, the need to increase tank filling capacity and rare earth raw material reserves, and a decrease in advance payments for trade operations.

Deeply involved in the main rare earth industry, and production of core products grew steadily. The company is focusing on building the three major industries of “rare earth, tungsten and copper” to continuously enhance resource control capabilities. In 2023, rare earth ore resource reserves were 121,300 tons and tungsten concentrate reserves were 68,200 tons. In 2023, the company expanded the production and sales scale of the three major products. On the rare earth side, it produced 2,458 tons of rare earth ore, +61% year over year, total investment volume was 8,211 tons, up 28% year on year, rare earth oxide 3552 tons, -3.51% year on year, and rare earth concentrate 1091 tons, 2.2.75% year on year; on the tungsten side, it produced 61.15 tons of tungsten concentrate, +57.14 tons; on the copper side, the company's shareholder Dabaoshan Mine achieved annual revenue of 1,620 billion yuan, total profit of 390 million yuan, production of copper concentrate 14,866 Tons, up 7.59% year on year, produced 1.55 million tons of sulfur concentrate (containing magnetic pyrite), an increase of 2.4% year on year.

Integrate into the China Rare Earth Group and open up new opportunities for the company's development. On December 29, 2023, Guangsheng Group transferred 100% of its direct shares in Guangdong Rare Earth Group to China Rare Earth Group. China Rare Earth Group will indirectly hold 38.45% of the company's shares through Guangdong Rare Earth Group and become the actual controller of the company, further promoting China Rare Earth Group's specialized integration of rare earth resources in Guangdong. China Rare Earth Group considers business similarities with Guangsheng Nonferrous in rare earth mining, smelting and separation, deep processing, and rare earth products trading, and promised to comprehensively use entrustment management, asset restructuring, equity swap/transfer, business adjustments or other legal methods within 5 years to steadily promote related business adjustments or integration to resolve competition issues in the industry.

Investment advice: Considering the decline in rare earth prices, we expect the company to achieve net profit of 3.0/4.4/50 billion yuan in 2024-2026 (44.630 million yuan 24-25 years ago), with year-on-year increases of 48.2%, 46.2%, and 12.5%, respectively. Considering the company's historical valuation and comparable company valuation, we give the company a valuation of 39 times in 2024, corresponding to a target price of 34.9 yuan, maintaining a “strong push” rating.

Risk warning: The price of rare earths fluctuates greatly; downstream demand falls short of expectations; the progress of project production expansion falls short of expectations.