Incident: The company achieved operating income of 7.652 billion yuan in 2023, a year-on-year decrease of 15.96%; realized net profit attributable to shareholders of listed companies of 306 million yuan, a year-on-year decrease of 49.87%. The first quarter of 2024 achieved operating income of 1,864 billion yuan, an increase of 10.03% over the previous year; realized net profit of 61 million yuan, an increase of 19.94% over the previous year. The company plans to distribute a cash dividend of 1.3 yuan (tax included) to all shareholders for every 10 shares, and the company plans to give 4 bonus shares (tax included) for every 10 shares to all shareholders. The company's dividend rate is 0.72% based on the closing price on April 25.

Comment: The pressure on the 2023 performance was mainly due to a decline in magnesium prices, and the year-on-year increase in Q1 performance in 2024 was mainly due to an increase in sales volume. According to WIND data, the average price of magnesium ingots in 2023 was 23,700 yuan/ton, -27.2% year-on-year, and the average price in Q1 in 2024 was 21,000 yuan/ton, -7.9% year-on-year and -8.9% month-on-month. According to the company announcement, the year-on-year increase in net profit due to Q1 in 2024 was mainly due to an increase in sales volume.

The price ratio of magnesium to aluminum has been below 1.5 for 11 consecutive months, which may be beneficial to downstream promotion. According to WIND data, as of April 25, 2024, the magnesium-aluminum price ratio had declined to less than 1, and the ratio had been below 1.5 for 11 consecutive months. The price ratio of magnesium to aluminum has been low for a long time or is beneficial to downstream promotion. According to the company's announcement, the company's subsidiary has successively reached cooperation with NIO on magnesium alloy seat mounting bracket assemblies; reached cooperation with Ningbo Jifeng Auto Parts Co., Ltd. to undertake magnesium alloy interior brackets for various types of passenger cars; and reached cooperation with BYD to design, develop and produce a new magnesium alloy CCB product for customers.

There are many new applications of magnesium alloys, and flying cars and hydrogen storage are expected to contribute new growth points: in addition to the automotive side and construction template fields, the company signed a cooperation agreement with Xiaopeng Flying Motor to become a designated supplier for key components such as instrument panel tube beam assemblies and middle channel left and right lower bracket assemblies. As steel moves from carbon metallurgy to hydrogen metallurgy, Baowu Group will generate new demand for hundreds of thousands of tons of magnesium-based hydrogen storage materials. In 2023, the company's magnesium-based hydrogen storage materials have been tested and will gradually be supplied in batches after customer testing.

The shareholder return plan for the next three years further consolidates the company's investment value. When the cash dividend conditions are met, the cumulative profit distributed by the company in cash in any three consecutive fiscal years is not less than 30% of the average annual distribution profit achieved in those three years. After comprehensively considering factors such as the characteristics of the industry in which it is located, its own business model, profit level, and whether there are major capital expenditure arrangements, when the company's development stage is mature and there are no major capital expenditure arrangements, cash dividends should account for at least 80% of the current profit distribution.

Profit forecast and rating: Considering the decline in magnesium prices, we lowered our profit forecast. We expect net profit to be 460 million yuan/780 million yuan in 2024-2025, down 45.9%/44.6%, and add the 2026 profit forecast to net profit of 1.18 billion yuan, corresponding to 2024-2026 PE of 28X/16X/11X. In view of the advantages of the company's integrated layout and the synergy effects after Baosteel Metal entered the market, we maintained an “gain” rating.

Risk warning: downstream demand falls short of expectations; industry supply is released too quickly; magnesium prices are falling; company project construction falls short of expectations; safety and environmental risks; risks of downstream technology path changes, etc.