Net profit to the mother decreased by 60.38% year on year in '23. Maintaining increased holdings, the rating company achieved operating income of 33.497 billion yuan, yoy -10.10%; net profit to mother was 2,371 billion yuan, yoy -60.38%. The sharp decline in profit was mainly due to the drop in rare earth prices in '23. As the growth rate of rare earth issuance indicators slowed in 24 and the relationship between supply and demand improved, we assume that the average price of praseodymium oxide in 24-26 was 45/50/550,000 yuan/ton, respectively. The company's EPS is expected to be 0.68/1.08/1.37 yuan in 24-26, of which the company's rare earth raw materials and other/magnetic materials business EPS will be 0.19/0.49 yuan respectively in '24. The average value of PE (24E) for rare earth raw materials and other businesses was 49.74X. Considering the company's leading position in the rare earth industry, the company was given PE (24E) 55X for this business; the PE (24E) average value for rare earth functional materials was 18.64X, giving the company PE (24E) 20X for this business. The company's target price is estimated at 20.25 yuan, maintaining the “gain” rating.
The decline in rare earth prices has led to a decline in the company's overall profitability
According to the annual report, in '23, the company produced 174,900 tons of refractive oxide, yoy +24.21%; of these, rare earth oxide/rare earth salt/rare earth metal production was 1.67/12.74/30,800 tons, yoy +30.24%/+22.86%/+26.79%, respectively. In terms of profit, the company's overall gross margin for 23 was 14.62%, yoy-13.17pct; among them, the gross margin of the rare earth raw materials/rare earth functional materials business was 18.13%/23.01%, and yoy-12.58pct/-24.55pct, respectively. At the same time, the company's inventory removal effect was remarkable. The company's assets depreciated by 379 million yuan in '23, a significant decrease from 914 million yuan in '22. As rare earth prices pick up and inventories decline, inventory impairment on the company's assets will gradually be eliminated.
The company accelerated the construction of downstream production capacity for rare earth permanent magnets, and achieved an integrated layout. The company simultaneously expanded the production capacity layout on the raw material side and the downstream magnetic material side. Construction of the green smelting upgrade project with an extraction and separation capacity of 106,700 tons/year began during the reporting period and is expected to be completed in Q4 in '24. At the same time, the company is also actively developing the downstream magnetic materials business. According to the annual report, the first phase of the Beibei Jiaxuan permanent magnet motor production base was completed in December 23, achieving an integrated layout from rare earth raw materials to permanent magnet motors. In addition, the company plans to produce 192,100 tons of smelting and separation products in 24, and the planned output growth rate is 9.83%.
The recovery in rare earth prices may drive the company's performance to gradually recover
According to data from the Ministry of Industry and Information Technology and the Ministry of Natural Resources, the growth rate of the country's first batch of mining and smelting and separation indicators in '24 was 12.5%/10.4%, respectively, down 6.5/7.9pct from the same period last year. The downward growth rate of indicators has slowed, compounded by the recent peak season for downstream new energy demand, and rare earth market prices are beginning to show signs of recovery. According to the company's announcement, the price of rare earth concentrate purchased by the company in 24Q2 was 16,800 yuan/ton (excluding tax, REO = 50%), down 19.02% from month to month, but in April, the company's praseodymium oxide listing price was 365,700 yuan/ton, which remained flat from month to month, and the company's profit is recovering. Based on the current optimistic NEV production schedule and the support of other traditional demand, we believe that the rare earth price recovery trend may continue. Since the company's cost pricing lags behind sales prices, it is expected that the company's profit situation may gradually improve as rare earth prices recover.
Risk warning: The indicators issued by rare earth mining and smelting fell short of expectations, and downstream demand fell short of expectations.