Incident: The company announced its 2023 annual report, achieving revenue of 6.688 billion yuan, an increase of -6.66%; net profit to mother of 564 million yuan, an increase of -19.78%; after deduction, it was 493 million yuan, an increase of -27.68%.

Excluding exchange earnings, the performance was in line with expectations, showing resilience. 1) Volume increase: In 2023, the company's total output of high-performance rare earth permanent magnet materials was 15,154 tons, up 18.52% year on year; of these, it used grain boundary penetration technology to produce 13,226 tons, up 32.72% year on year, accounting for 87.28% of total output, up 9.34 percentage points from the same period last year; total sales volume of high-performance rare earth permanent magnet materials was 15,122 tons, up 25.60% year on year. 2) Price reduction: Prices of rare earth raw materials fluctuated greatly in 2023. According to data published by Asia Metal Network and the China Rare Earth Industry Association, the average price of praseodymium metal in 2023 was 651,400 yuan/ton, a decrease of 35.64% compared to 2022. Under the unfavorable situation of a sharp drop in raw material prices, the company's net profit in 2023 remained stable compared to 2022, excluding the impact of exchange gains of 150 million yuan from Hong Kong stock listing financing and additional R&D expenses in the same year, reflecting the strong resilience of operations. 3) Production capacity: The company formulated a plan in March 2021 to gradually allocate resources and capabilities to build production bases in Ganzhou, Baotou and Ningbo, and plans to build a production capacity of 40,000 tons of high-performance rare earth permanent magnet materials and an advanced magnetic module production line by 2025. Currently, the company has an annual production capacity of 23,000 tons of high-performance NdFeB permanent magnet material blanks, and the full capacity utilization rate of 2023 will reach more than 90%. The Baotou Phase II 12,000 tons/year production capacity project, the Ningbo 3,000 tons/year high-end magnetic material and 100 million module production capacity project, and the Ganzhou high-efficiency and energy-saving motor magnetic material base project are under construction. It is expected that a 38,000 tons/year rough production capacity production line will be built by the end of 2024. The company plans to invest in the construction of the “Mexico Project to Build a New Production Line with an Annual Output of 1 Million Units/Magnetic Module” in Mexico. After the project is completed and delivered, it will have a production capacity of 1 million units/set of magnetic components per year. It helps enhance the company's market competitiveness in fields such as humanoid robots and new energy vehicles. 4) Cash flow and dividends: The company's net operating cash flow increased sharply to 1,518 billion yuan in 2023; cash payments of 348 million yuan are expected, accounting for 61.70% of net profit attributable to mother.

Profit forecast: Considering the pace of the company's new production capacity, and the company's production capacity is determined by sales, and the certainty of growth is strong, we expect that in 2024-2026, the company's EPS will be 0.49, 0.61, and 0.83 yuan, respectively, and PE will be 32, 26, and 19 times, respectively, maintaining a “buy” rating.

Risk warning: Product prices and gross margin continue to decline due to declining industry demand and increased competition.