Incident: Zhenghai Magnetic Materials released its 23rd annual report. In 2023, it achieved operating income of 5.884 billion yuan, -7.0% year on year; realized net profit of 448 million yuan, +10.7% year on year; after deducting non-net profit of 385 million yuan, +0.3% year on year. Among them, 23Q4 achieved revenue of 1,247 billion yuan in a single quarter, -29.24% YoY, -15.16%; realized net profit to mother of 80 million yuan, -19.33% YoY and -36.90% YoY; and realized deducted non-net profit of 331 million yuan, -65.24% YoY and -74.15% YoY. The performance was in line with expectations.

23 years of steady improvement in performance, highlighting the company's competitive advantage:

1) Volume: In 2023, the company's magnetic material blank output was 18,600 tons (yoy +16%), direct magnetic material sales volume was 17,178 tons (yoy +12.16%), permanent magnet material components sold 4.047 million pieces (yoy +479.68%); 2) Price: The average price of rare earth dropped sharply in 23 years, and the average price of praseodymium metal was 651,400 yuan/ton, down 35.64% year on year. The decline in raw material prices led to the sales price of the company's products from 39.4 to 317,000 yuan/ton; 3) Profit: 18.05 million yuan per ton of magnetic materials business in '23 %, an increase of 3.70 pcts over the previous year. The gross profit per ton was 57,000 yuan/ton, and the net profit per ton was 27,000 yuan/ton. The profit per ton remained relatively stable, and the stability of profit during the downturn in the industry highlighted the company's competitiveness.

The trend is positive in Shanghai. Facing the fierce competitive situation, Shanghai Dagun aims to “improve efficiency, reduce costs, and lay the foundation” to provide customers with high-quality products and technical services. In 2023, the NEV motor drive system output was 22,500 units, up 2.39% year on year. During the reporting period, it achieved operating income of 104 million yuan, an increase of 14.24% year on year, and losses narrowed to 37 million yuan (loss of 62 million yuan in 2022).

The share of new energy vehicles continues to rise. The company's average coverage of the top 10 international car brands, the top 5 autonomous car brands, and the top 5 new car builders reached 90%. In 2023, the company's NdFeB material products can be equipped with 4.49 million sets of energy-saving and new energy vehicle motors, an increase of 29% over the previous year. In '23, the automobile industry produced 11874 tons of magnetic materials (yoy +22.11%) and sold 11,315 tons (yoy +19.23%), and the share of automotive sales increased further to around 62%.

Magnetic material production capacity is expanding steadily. With the completion of the second phase of the Nantong base of 6000 tons, the company currently has a magnetic production capacity of 30,000 tons (10,000 tons in the East-West factory area, 8,000 tons in the Fuhai factory area, and 12,000 tons in the Nantong base). The East-West factory area and Fuhai factory area maintain high capacity utilization rates. The Nantong base is still in the production capacity climbing phase. The total production capacity of the third phase of 6000 tons is expected to reach 36,000 tons by 2026.

Profit forecast and investment suggestions: Considering the intensification of the competitive pattern in the industry, we lowered the 2024-2026 magnetic material shipments (rough caliber) to 23,000, 28,000, and 32,000 tons respectively. The company's net profit for 2024-2026 is estimated to be 559, 6.85, and 806 million yuan, respectively (the previous value of the 24-25 net profit forecast in the August 28, 23 report was 8.19 billion yuan and 1,073 million yuan), according to the closing market value of 9.195 billion yuan on March 29, the corresponding PE is 16.4. 13.4 and 11.4X, maintaining the company's “buy” rating.

Risk warning: Risk of price fluctuations of main products; project construction progress falling short of expectations; sales of new energy vehicles falling short of expectations; deviations in demand estimates and delays in the use of public information in research reports; profit forecasts fall short of expectations due to changes in core assumptions; there is a risk that public data used in research reports will not be updated in a timely manner, etc.