The company's net profit to mother fell -6.10% year on year in '23, maintaining operating income of 824 million yuan and yoy -16.95% in '23; net profit to mother of 161 million yuan, yoy -6.10%. The rapid decline in rare earth prices in '23 had a great impact on the company's performance. Based on stabilizing prices of rare earth raw materials and judging the recovery in downstream demand, we expect the company's net profit to be 1.886/2.18/240 million yuan for 24-26, respectively (the previous value was 2.09/230 million yuan for 24-25 years, respectively). Comparatively, the company Wind agreed to expect PE27.06X and gave the company 27.06XPE in 24. The estimated EPS for 24 was 0.57 yuan, and the target price was 15.42 yuan (previous value 16.52 yuan), maintaining the “hold” rating.

Fluctuations in raw material prices led to a decline in the company's profitability in 23Q4

According to the annual report, the company sold 2,856 tons of rare earth permanent magnet materials in 2023, yoy +8.59%. The company's comprehensive gross margin and net margin for the year '23 were 32.21%/19.54%, yoy+4.54pct/+2.19pct, respectively. Affected by the rapid decline in rare earth raw material prices in the fourth quarter, the gross margin/net margin of 23Q4 was 23.99%/7.74%, and qoq-8.88pct/-12.50pct, respectively. In terms of expenses, the company's expenses rate for the total period of 23 years was 9.79%, yoy+2.34pct. Among them, the company's 23 years of sales/management/ were 1.04%/4.47%, respectively, and remained relatively stable. R&D cost rate reached 6.45%, yoy+1.49pct. The financial rate was -2.17%, and YOY+0.58pct was mainly due to a year-on-year decrease of 7.289 million yuan in the company's exchange earnings.

The company's product structure remained stable in '23, and future demand for hot-pressed NdFeB products is broad. According to annual report information, the company's bonded NdFeB business revenue in 2023 was 746 million yuan, yoy -15.67%, accounting for 90.58% of total revenue, yoy+1.38pct. Hot-pressed NdFeB revenue reached 57.54 million yuan, yoy -24.15%, accounting for 6.98% of total revenue, yoy-0.67pct. Hot-pressed NdFeB materials are high-performance NdFeB materials. They are widely used in automotive parts such as EPS, CNC machine tools and robots, and have broad application prospects. According to the annual report, only one Japanese company in the world, Daido Electronics, had the capacity to produce this material on a large scale. By the end of '23, the company had a production capacity of 300 tons of hot-pressed NdFeB, and its mass-produced products have been widely recognized by the market.

Prices of rare earth raw materials have stabilized, and the supply and demand pattern of the NdFeB industry is expected to improve. On February 6, '24, the Ministry of Industry and Information Technology and the Ministry of Natural Resources issued the first batch of rare earth mining and smelting and separation indicators in '24. The growth rates of the country's first batch of mining and smelting and separation indicators in '24 were 12.5%/10.4% respectively, down 6.5/7.0 pct from the same period last year. The growth rate of rare earth issuance indicators has converged, and the rare earth oversupply situation is expected to reverse. Currently, prices have bottomed out. Under the cost addition model, we believe that stabilizing the price of rare earth raw materials will help improve the profits of the downstream NdFeB industry. At the same time, with the accelerated implementation of the humanoid robot field and the improvement in demand for energy saving, the boom in the magnetic materials industry is expected to bottom out.

Risk warning: Prices of rare earths fell beyond expectations, and downstream demand fell short of expectations.