Magnesium-aluminum production and sales declined, and project expansion helped increase production. The company's sales volume for non-ferrous metal smelting and rolling processing in 2023 was 363,800 tons, a year-on-year decrease of 13.93%; production volume was 367,700 tons, a year-on-year decrease of 16.41%, mainly due to the decline in magnesium consumption, which led to a sharp drop in the volume and price of magnesium alloys. The average price of magnesium ingots in 2023 was 21,953 yuan/ton, down 27.5% year on year. The company currently has 100,000 tons of raw magnesium production capacity and 200,000 tons of magnesium alloy production capacity. In the future, it is estimated that 300,000 tons of raw magnesium and 300,000 tons of magnesium alloy will be built in Qingyang, 50,000 tons of raw magnesium production capacity will be built in Chaohu Lake, and 100,000 tons of raw magnesium and 100,000 tons of magnesium alloy will be built in five units. The company positions the entire process of the industrial chain and promotes key projects. At the end of 2023, the Anhui Baomei light alloy project was launched; Chaohu Yunhai is expected to be put into operation in the second half of 2024, and production is expected to increase. In the first quarter of 2024, magnesium-aluminum sales increased, and product profitability increased year-on-year.

Revenue declined year over year, and demand dragged down gross profit margins. In 2023, the company achieved revenue of 7.652 billion yuan, a decrease of 15.96%, mainly due to a sharp drop in volume and price in the magnesium market. Among them, magnesium alloy revenue was 2,528 billion yuan, a decrease of 23.58%; revenue from magnesium alloy deep processing was 1,055 billion yuan, down 0.99%; revenue from aluminum alloy deep processing products was 1,051 billion yuan, down 48.20%; revenue from aluminum alloy deep processing products was 1,833 billion yuan, an increase of 31.86%, mainly due to the automobile weight reduction process, and downstream market demand such as 3C electronics consumption fell short of expectations. The company's overall gross margin was 13.44%, a decrease of 2.64pct. Among them, the gross profit margin of magnesium alloy products was 18.08%, down 11.06 pct, mainly due to a sharp drop in the market volume and price of magnesium alloy deep processing products; the gross profit margin of magnesium alloy deep processing products was 12.37%, an increase of 4.38pct, mainly due to improved profit of magnesium alloy building templates; the gross profit margin of aluminum alloy products was 6.29%, up 4.71 pct, mainly due to structural transformation of the aluminum products sector; and the gross profit margin of aluminum alloy deep processing products was 10.27%, the same increase of 0.05 pct.

The gross margin for the first quarter of 2024 was 11.87%, up 1.78pct from the same period.

Expense rates increased and net profit declined during the period. The fee rate for the 2023 period was 8.41%, an increase of 1.40pct. The rate increased mainly due to the decline in revenue. Among them, the sales expense ratio was 0.29%, the main reason was the reduction in office expenses; the management expense ratio was 2.21%, and the main reason was the increase in depreciation and amortization; the R&D expense ratio was 4.61%, 0.25pct; the financial expense ratio was 1.29%, 0.45 pct of the same increase, mainly due to a decrease in exchange earnings; the company's impairment losses totaled 8.716,500 yuan, a decrease of 21.35 million yuan. Overall, the company achieved net profit of 306 million yuan to mother, a decrease of 49.82%. Net profit after deducting non-return to mother was 303 million yuan, a decrease of 47.15%. Net profit for Q1 in 2024 was 60.72 million yuan, up 19.94% year-on-year and 19.94%.

Operating cash inflows have declined, and the balance ratio has declined. The company's revenue ratio in 2023 was 0.8970, down 5.72 pct, mainly due to a decrease in cash received from sales of products; the payout ratio was 0.8643, a decrease of 0.06 pct. Overall, the net operating cash inflow was 350 million yuan, a year-on-year decrease of 992 million yuan; the net outflow from investment activities was 2,399 billion yuan, an increase of 597 million yuan over the previous year, mainly due to an increase in cash payments for the purchase of fixed assets and new construction projects under construction. The company's balance ratio was 47.40%, down 1.65pct year on year, mainly due to an increase in assets under construction and a decrease in short-term loans. In addition, the company further shortened the magnesium alloy building template process, reducing the overall electricity consumption of the alloy by 20%, reducing the energy consumption of die-casting by more than 30%, and significantly reducing production and processing costs.

The Ministry of Industry and Information Technology issued a plan to encourage the development of products such as magnesium alloy construction templates to support increased exports and added value. Furthermore, in the first quarter of 2024, the subsidiary signed a development agreement with an automobile manufacturer for oversized magnesium alloy integrated die castings, which is conducive to expanding the future development space of magnesium.

Investment advice: Due to the decline in magnesium demand, the company's performance has declined. The company increased production capacity optimization and layout, and actively expanded downstream applications. Considering the sharp decline in the magnesium market volume and price in the past, we expect the company's net profit to be 4.84, 6.62, and 979 million yuan in 2024-2026, corresponding to PE of 25.6, 18.7, and 12.7 times, maintaining a “highly recommended” rating.

Risk warning: raw material price fluctuation risk, market demand fluctuation risk, exchange rate fluctuation risk.