Key points of investment

The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 7.652 billion yuan, a year-on-year decrease of 15.96%; net profit to mother was 306 million yuan, a year-on-year decrease of 49.82%. In 2023, it is proposed to distribute a discovery dividend of 1.3 yuan (tax included) to all shareholders for every 10 shares, 4 bonus shares (tax included), and the share capital will not be transferred from the Provident Fund.

In the first quarter of 2024, the company achieved revenue of 1,864 billion yuan, an increase of 10.03% over the previous year; realized net profit of 607.19 million yuan, an increase of 19.94% over the previous year. Non-net profit deducted from mother was 604.94 million yuan, an increase of 32.73% over the previous year.

Weak demand in 2023 led to a drop in magnesium prices, which dragged down the company's performance. According to Wind, the average price of magnesium ingots in China in 2023 was 23,699 yuan/ton, down 27% year on year. In 2023, global raw magnesium production capacity was 1.63 million tons, and production was 1 million tons, down 9.9% year on year. Global magnesium consumption in 2023 was about 1.05 million tons, down 8.7% year on year. In 2023, China's raw magnesium production capacity was 1.36 million tons, raw magnesium production was 822,400 tons, a year-on-year decrease of 11.9%, and magnesium alloy production was 345,200 tons, a year-on-year decrease of 3.5%.

The overall decline in demand in the magnesium industry in 2023 led to a drop in magnesium prices.

In 2024, the price of magnesium bottomed out and fluctuated. The company's gross margin fell month-on-month, and the average price of Q1 magnesium ingots in 2024 was 21,000 yuan/ton, down 9% month-on-month. By the end of April 2024, magnesium prices had bottomed out and rebounded to 202,000 yuan/ton. The company's overall gross sales margin in 2023 was 13.44%, down 2.65% year on year. By product, the gross margin of magnesium alloy products was 18.1%, down 11.1% year on year; the gross profit margin of magnesium alloy deep processing products was 12.4%, up 4.4% year on year; the gross margin of aluminum alloy products was 6.3%, up 4.7% year on year; and the gross profit margin of aluminum alloy deep processing products was 10.3%, up 0.1% year on year. 2024Q1's overall gross sales margin was 11.87%, up 1.8% year on year and down 2.7% month on month.

The application field of magnesium alloys continues to expand

In 2023, the company has successfully developed oversized magnesium alloy one-piece die-castings. In March 2024, the company's subsidiary Chongqing Boao signed a development agreement with an automobile manufacturer for oversized magnesium alloy integrated die castings, and will jointly develop oversized magnesium alloy integrated die castings with this customer. The company signed a cooperation agreement with Xiaopeng Flying Motor and became its designated supplier for key components such as instrument panel tube beam assemblies and middle channel left and right lower bracket assemblies. The company continues to increase investment in R&D and construction in magnesium hydrogen storage, and has deep cooperation with many research institutes such as Shanghai Jiao Tong University and Chongqing University. In 2023, the company's magnesium-based hydrogen storage materials have been tested and will gradually be supplied in batches after customer testing.

The company's many projects are progressing steadily

The company currently has 100,000 tons of raw magnesium production capacity and 200,000 tons of magnesium alloy production capacity. The company built 50,000 tons of raw magnesium production capacity in Chaohu Lake, 100,000 tons of raw magnesium and 100,000 tons of magnesium alloy in Gutai, and 300,000 tons of magnesium alloy in Qingyang. The Chaohu Yunhai Expansion Project will be put into operation in the second half of 2024, and five Yunhai Expansion Projects are under construction. The Anhui Baomei light alloy project started thermal load testing on the magnesium production line on December 23, 2023.

Profit forecasting

Due to the sharp drop in the prices of magnesium ingots and magnesium alloys, we lowered the company's profit forecast. We expect the company's net profit to reach 4.4/7.9/1.06 billion yuan in 2024-2026, respectively, or +43.3%/+79.5%/+34.9% year-on-year. As a leader in the magnesium industry, the company will advance steadily in the future with significant growth and maintain the company's “buy” rating.

Risk warning

Downstream demand fell short of expectations, the company's project progress fell short of expectations, and magnesium prices fluctuated greatly.