Results for 2023 and 1Q24 fell short of our expectations
The company announced its 2023 results: operating income of 66.3 billion yuan, +5.2% year-on-year, and net profit to mother of 3.35 billion yuan, -14.3% year-on-year. Of these, 4Q23 achieved operating income of 15.2 billion yuan, +6.2% year over month, and -14.3% month on month; net profit to mother was 340 million yuan, -62.6% year on year and -63.6% month on month.
The company announced 1Q24 results: operating income of 15 billion yuan, -21.7% YoY, -1.6% YoY; net profit to mother of 520 million yuan, -49% YoY, +54.7% YoY. Due to falling prices of metals and lithium battery materials, the company's 2023 and 1Q24 results fell short of our expectations.
The sharp increase in production and sales of major products in 2023 partially hedged the downward price impact. In terms of volume, in 2023, the company's nickel, lithium, and tertiary precursor production was +83%, +141%, and +21% year-on-year, respectively, with sales volume +88%, +104%, and +31% year-on-year. The production and sales volume of major products increased significantly year-on-year, partly hedging the impact of falling prices. In terms of price, according to iFind and Asia Metal Network, the average prices of domestic cobalt, nickel, lithium carbonate, triglyceride precursors, and cathode materials were -39%, -13%, -48%, -22%, and -34% year-on-year, respectively. The price drop led to the company's overall gross margin of -4.5ppt year-on-year.
Development trends
Asset depreciation was returned by a small amount in the first quarter, and depreciation pressure may gradually clear up. By the end of the first quarter, domestic cobalt metal prices and overseas MB cobalt prices were down 1.6% and 2.2% respectively from the beginning of this year, and the decline in cobalt prices was slowing down. According to the announcement, the 1Q24 company's assets depreciated back to 13 million yuan, an increase of 346 million yuan over the previous month. Recently, the Democratic Republic of the Congo (DRC), the world's largest producer of cobalt, is seeking suggestions from international industry organizations to take measures to raise the price of this battery metal. We believe that this move by the Democratic Republic of the Congo (DRC) may have a profound impact on the supply of the cobalt industry, forming some support for the subsequent trend in cobalt prices, and the risk of the company's depreciation is gradually being cleared up.
By optimizing the industrial structure and consolidating competitive advantages, the nickel business is expected to continue to expand. According to the announcement, in the face of factors such as downstream lithium battery products and technological innovation and upgrading, and changes in the lithium battery industry chain market environment, the company made appropriate delays and adjustments for integrated projects with an annual output of 50,000 tons of ternary cathode materials and 100,000 tons of ternary precursor based on its production capacity scale and industry development cycle. In 2024, the company will implement the business ideas of comprehensive coordination, technological support, cost reduction and efficiency, expand the share of existing orders, seize incremental order opportunities, continue to build a competitive advantage of “leading products and leading costs”, and further consolidate its leading position in the industry. Considering that Huafei's 120,000-ton nickel metal-weight hydrometallurgy project basically reached production at the end of the first quarter of 2024, we estimate that the company's equity in nickel products is expected to increase 46% year-on-year in 2024.
Profit forecasting and valuation
We lowered the company's main product prices and production assumptions, and lowered the 2024/2025 profit forecast by 50.7%/54.7% to $2.6/2.9 billion. The current stock price corresponds to 18.1/16.1 times the 2024/2025 price-earnings ratio. Taking into account profit adjustments and the current high level of prosperity in the non-ferrous industry, we lowered our target price by 31.6% to 32.55 yuan, corresponding to a price-earnings ratio of 21/19 times 2024/2025, with 17.7% upside compared to the current stock price. We maintain our outperforming industry ratings.
risks
Metal prices fell beyond expectations, project progress fell short of expectations, and sales of new energy vehicles fell short of expectations.