2023 results fall short of our expectations
The company announced its 2023 results: achieved operating income of 20.8 billion yuan, -9% year-on-year, and realized net profit of 200 million yuan, or -12.5% year-on-year. 4Q23 achieved operating income of 5.24 billion yuan, +16.8% year-on-year, and +18.7% month-on-month; net profit to mother of 37 million yuan, +85.8% year-on-year, and -42.5% month-on-month. The fall in rare earth prices caused the company's performance to fall short of our expectations.
Sales of rare earth minerals have increased dramatically, partly hedging the impact of falling rare earth prices. First, in 2023, the production and operation of the Huaqi Pingyuan mine, the main mine producing rare earths, was on the right track, and the company's rare earth mineral sales all increased dramatically over the same period last year. According to the announcement, the company's rare earth minerals/sales volume in 2023 was 2458/2721 tons, respectively, +61%/+324% year-on-year. Second, supply and demand in the rare earth industry were relaxed in 2023, and rare earth prices declined.
According to the Asian Metal Network, the average prices of praseodymium oxide and medium yttrium-rich Europium ore in 2023 were -36%/-31%, respectively.
Development trends
The actual controller change was completed, and the company ushered in new development opportunities in a new journey, positioning 2024 as the “Year of Improvement of Production and Operation”. First, according to the company's announcement on April 11, Guang Sheng Holdings, the indirect controlling shareholder of the company, has completed the share transfer. China Rare Earth Group has become the actual controller of the company. The company will be fully integrated into the China Rare Earth Group and usher in new development opportunities in the new journey. Second, in 2024, the company will make every effort to increase storage and production, reduce costs and increase efficiency. Expand the upstream resource sector, accelerate the entry of Xinfeng Mine into the development stage, achieve a steady increase in production, increase exploration efforts in surrounding resources such as the Hongling Tungsten Mine, and actively declare mineral rights. Refine the midstream segment, continue to promote Fuyuan's digital transformation efforts, and achieve a further reduction in average unit cost in 2024. Strengthen the downstream application sector, continuously improve the capacity utilization rate of Shengyuan Company, and comprehensively improve production quality and efficiency.
Prices of rare earths have rebounded steadily, and the risk of depreciation has gradually cleared up. Disruptions occurred against the backdrop of a recovery in downstream demand and relative supply restrictions, and improvements in supply and demand contributed to a steady recovery in rare earth prices. According to Asia Metal Network, as of April 16, the Chinese yttrium-rich european ore and praseodymium oxide were reported at 19.2 and 385,500 yuan/ton, up 20% and 11% from the March low. We believe that the implementation of the domestic trade-in policy is expected to further boost downstream demand. In a context where the growth rate of the first batch of domestic rare earth indicators is slowing down and current rare earth prices are close to the right side of the global cost curve, the increase in supply is limited, rare earth prices are expected to rise moderately, and the risk of company depreciation will gradually clear up.
Profit forecasting and valuation
In view of the moderate recovery in rare earth prices, the future price center fell somewhat from previous expectations, and Xinfeng Mine fell short of expectations. Net profit for 2024 was reduced by 35% to 368 million yuan, and a net profit forecast of 478 million yuan was introduced for 2025. The current stock price corresponds to 2024/25 26.6/20.5 times the price-earnings ratio. Due to the decline in profits but improvements in supply and demand, the valuation level of the rare earth sector has begun to be repaired recently. We only lowered our target price by 25% to 34.13 yuan, which corresponds to a price-earnings ratio of 31/24 times in 2024/25. There is 17.2% room for growth compared to the current stock price. We maintain our outperforming industry ratings.
risks
Rare earth prices fell, and production capacity expansion fell short of expectations