Revenue remained stable, and profits declined somewhat. In 2023, the company achieved revenue of 2.77 billion yuan (yoy +0.3%), net profit attributable to mother of 270 million yuan (yoy -29.6%), and net profit of 210 million yuan (yoy -38.3%) after deducting non-attributable net profit. The main reason for the large decline in the company's profit is that the profitability of the participating companies' iron phosphate business declined sharply year-on-year, and the company's investment income was drastically reduced. 2024Q1 achieved revenue of 610 million yuan (yoy +0.3%) and net profit to mother of 50 million yuan (yoy -8.9%), which is expected to be mainly due to losses of participating companies in the first quarter.

Inspection and testing, metal products, etc. have achieved good development. By sector, the company's inspection and testing reached 650 million yuan (yoy +14.9%) in 2023, accounting for 23.6%. Metal products reached 490 million yuan (yoy +18.6%), accounting for 17.8%. Special equipment for metallurgy, mining, and electromechanical engineering reached 180 million yuan (yoy +19.6%), accounting for 6.5%. Electronic component revenue reached 630 million yuan (yoy -4.1%), accounting for 22.8%. The industrial raw materials business achieved 760 million yuan (yoy -10.6%), accounting for 27.5%.

Gross margin has increased, and overall expenses have remained stable. The consolidated gross profit margin for 2023 was 25.9% (yoy+2.2pct), and the net margin for the same period was 11.6% (yoy-4.0pct). In terms of gross margin, the electronic components business increased significantly, achieving 16.0% (yoy+5.6pct); metal products/metallurgy, mining, mechanical and electrical engineering special equipment achieved 22.2%/26.6% (yoy+1.3pct/+1.2pct); and industrial materials/inspection achieved gross profit margin of 13.8% /52.7 (yoy-1.1pct/-4.0pct). In 2023, the sales expense ratio was 2.7% (+0.9pct), mainly due to changes in the employment pattern of the inspection business, changes in cost collection accounts; management expense ratio of 6.1% (+0.4pct); financial expenses ratio of 0%, remained unchanged; and R&D expenses rate of 5.3% (-0.2pct). Achieved a net operating cash flow of 130 million yuan, a year-on-year decrease of 20.9%.

Benefiting from Baowu's entry, the magnetic materials business can be expected to grow. Currently, the company has a production capacity of 50,000 tons of electronic grade manganese tetroxide/25,000 tons of battery-grade manganese tetroxide/20,000 tons of permanent magnet ferrite devices/5,000 tons of soft magnetic devices/4,000 tons of metal magnetic powder core/2000 tons of rare earth permanent magnet devices/70,000 tons of metal products. The company has 639 patents, including 181 invention patents. The company has 289 R&D personnel, 12 of whom receive special allowances from the State Council. They will continue to carry out technological innovation around products that meet the current and future needs of the country and market. In July 2023, the restructuring between Baowu and China Steel Group applied for industrial and commercial change registration. Baowu passed 32.9% of China Steel Group's indirect holding company. As a magnetic materials business platform under Baowu Group, the company is expected to be deeply integrated into Baowu's “one base and five yuan” business plan, share excellent management mechanisms, management methods, scientific and technological achievements and capital, and benefit from the background of major shareholders to obtain upstream resource endowments and become a first-tier magnetic materials supplier. The internal integration process is worth looking forward to.

Profit forecast: 2024-2026 is expected to achieve revenue of 335/40.5/4.90 billion yuan, net profit to mother of 3.3/40/50 billion yuan, corresponding PE of 17.5/14.4/11.6x. Due to losses in the participating companies' performance, the performance forecast was lowered compared to the previous report. The company has a good incentive system for the testing business, and the magnetic materials business is enjoying the growth of the industry. It is expected to maintain high revenue and profit growth in the future and maintain a “buy” rating.

Risk warning: The growth rate of downstream demand for magnetic materials falls short of expectations, testing business development falls short of expectations, risk of fluctuations in raw material prices, etc.