Incident: Baogang Co., Ltd. released its 2023 annual report. The company achieved operating income of 70.565 billion yuan, a year-on-year decrease of 2.23%; net profit attributable to shareholders of listed companies was 515 million yuan, turning a year-on-year loss into a profit.

Comment:

The company is the world's largest supplier of rare earth upstream resources. Baiyun Ebo Mine, owned by Baogang Group, the controlling shareholder, is a world-famous treasure trove of resources, with proven iron ore reserves of 1.4 billion tons; rare earth refractive oxide reserves of 39 million tons, ranking first in the world; fluorite reserves of 130 million tons, ranking second in the world; and 6.6 million tons of niobium, ranking second in the world. Baiyun Ebo ore mined by Baogang Group is an exclusive supplier company. The company has the right to develop Baiyun Ebo mine resources. The company owns 670 million tons of iron ore reserves in Baiyun Ebosi Ore, with an average rare earth grade of 1.07%. The Baiyun Ebo mine tailings depot owned by the company has resource reserves of 200 million tons, rare earth refractive oxide reserves of about 13.82 million tons, and fluorite reserves of 43.92 million tons.

Total rare earth mining control indicators continue to increase. In 2023, the total control index for rare earth mining was 255,000 tons of REO, an increase of 45,000 tons over 2022. The indicator is usually issued in two batches a year, with the third batch of indicators being released for the first time in 2023. The total control target for the first batch of rare earth mining in 2024 was 135,000 tons of REO, an increase of 15,000 tons of REO over the first batch in 2023. Currently, the company and affiliated company Northern Rare Earth calculate and adjust rare earth concentrate prices every quarter according to the pricing formula, and re-sign rare earth concentrate supply contracts or supplementary agreements and make announcements. In 2023, rare earth concentrate related transaction prices were 35,313 yuan/ton, 31,030 yuan/ton, 20176 yuan/ton, and 20,536 yuan/ton (REO = 50%), respectively. In the first two quarters of 2024, rare earth concentrate-related transaction prices were 20,737 yuan/ton and 16,792 yuan/ton, respectively (REO = 50%).

Stronger supply than demand affects the operating efficiency of the steel industry. In 2023, as supply was stronger than demand, and the actual decline in cost focus was less than the decline in steel prices, the operation of the steel industry showed a trend of “weakening demand, falling prices, high costs, and declining profits.” The steel consumption structure has changed, new demand for steel such as new energy steels driven by green and low carbon has increased, and demand for traditional steel such as automobiles, shipbuilding, and home appliances is improving. The rise in demand for steel in the domestic manufacturing industry and the increase in steel exports have become the main driving forces supporting the current increase in steel production, and the contraction in demand for steel in the construction industry has become the main factor in the decline in consumption.

Investment recommendations and ratings: In 2024-2026, the company's revenue is expected to be 719.750.2/78.62 billion yuan, respectively, and net profit to mother is 729/19.07/3.188 billion yuan, respectively. Stronger supply than demand in the steel industry has led to a decline in the company's steel business profits, but considering that the company has the highest rare earth oxide reserves in the world and the increase in total rare earth mining control indicators year by year, the company was given a “buy” rating.

Risk warning: the decline in rare earth prices, the risk that the profitability of the company's rare earth business falls short of expectations; the risk that the steel industry is sluggish and the company's steel business continues to lose large losses; the risk that performance forecasts and valuation judgments fall short of expectations.