Performance summary: In 2023, the company achieved operating income of 7.65 billion yuan (-16.0%), achieved net profit of 310 million yuan (-49.8%), corresponding basic EPS of 0.46 yuan, and net profit after deduction of 300 million yuan (-47.2%); it plans to distribute a cash dividend of 1.3 yuan for every 10 shares to all shareholders, and 4 bonus shares. 2024Q1 revenue was 1.86 billion yuan (+10.0% YoY, -10.8% YoY), net profit to mother was 60.1 billion yuan (YoY +20.0%, Q-3 8.7%), and EPS for the single quarter was 0.09 yuan;

Magnesium prices continue to bottom out, and the share of deep-processed products continues to rise: due to factors such as insufficient downstream demand, weakening product exports, and falling prices of ferrosilicon and coal raw materials, etc., the average price of magnesium ingots remained volatile at the bottom in 2023. The average price of magnesium ingots was 22,200 yuan/ton, down 27.6% year on year due to high base. Dragged down by weak product prices, the company's magnesium alloy product revenue during the reporting period was 2.53 billion yuan (-23.6%); in terms of aluminum alloys, product revenue fell sharply by 48.2% year on year due to the company's active adjustment of the product structure, falling for two consecutive years. At the same time, the company's deep-processing products continued to expand: magnesium alloy actively expanded medium and large-scale magnesium casting projects such as instrument panel brackets and seat brackets, and further improved the surface treatment process in building templates, and reached cooperation intentions with some state-owned enterprises and obtained substantial orders; on the aluminum alloy side, the company accelerated product structure transformation and upgraded and expanded production and sales of high-value-added products such as microchannel flat tubes and automotive structural parts; the annual magnesium and aluminum deep processing accounted for 38% of the company's revenue, which is a significant increase compared to 27% in the same period in 2022. In terms of profitability by product, although negatively affected by the decline in magnesium prices, the company's deep-processing products continued to deepen their layout. The gross margins of magnesium alloy and magnesium deep processing products were 18.1% (-11.1pcts) and 12.4% (+4.4pcts) respectively; thanks to product restructuring, the gross margin of aluminum alloy was 6.3% (+4.7pcts), and the gross margin of aluminum deep-processing products was 10.3%, which remained stable;

Financial data: During the reporting period, the company's management expenses increased 20.1% year on year, mainly due to an increase in depreciation and amortization; financial expenses increased 28.9% year over year due to a decrease in exchange income; net cash flow from operating activities fell 73.9% year on year, mainly due to falling sales prices, increased accounts receivable and falling profits; net cash flow from financing activities increased 337% year on year, mainly due to increased cash received from financing;

2024Q1 results exceeded expectations: Considering that magnesium prices in the first quarter of 2024 were still bottoming out (average price 19,600 yuan/ton, down 8.7% year on year), the increase in performance was mainly due to increased sales volume and the year-on-year increase in product profitability due to scale effects and product structure optimization. The management expense ratio during the reporting period was 2.3% (+0.4pcts), mainly due to the year-on-year increase in asset depreciation and amortization expenses;

The magnesium-aluminum ratio has returned to a historically low level. Focus on the penetration process of deep-processing products: Affected by the loose pattern of supply and demand, the magnesium-aluminum ratio has now fallen to a historical low of 1, and the replacement effect of magnesium alloys from an economic perspective is once again prominent.

As a leading enterprise in the magnesium industry, the company now has a complete industrial chain from dolomite mining - raw magnesium smelting - magnesium alloy - magnesium alloy deep processing - magnesium alloy recycling. The cost advantage of the entire industry chain is remarkable. At the same time, the company is also continuing to expand the production capacity of raw magnesium and magnesium alloys to meet the growing demand for magnesium alloys. The Chaohu 50,000 ton raw magnesium project will be put into operation in the second half of 2024, five Yunhai expansion projects are under construction, and the Anhui Baomei light alloy project has already started thermal load testing of the magnesium production line at the end of 2023. The medium- to long-term scale advantage continues to be strengthened, and the industrial chain is continuously optimized. At the same time, it is also planning to master upstream resources such as raw materials such as ferrosilicon. Combined with China's Baowu large-scale production technology and equipment advantages, it can effectively stabilize the price of magnesium products in the future, and promote and lead the continuous expansion of the application of magnesium alloys in the downstream field;

Integrated die casting continues to make new progress: with its excellent die-casting performance, magnesium alloy can meet the die-casting needs of automotive integrated structural parts. Last year, the company successfully tested two types of oversized NEV structural parts: integrated body castings and battery case covers. The projection area was greater than 2.2 meters? It effectively reduced the weight by 32% compared to aluminum substrates; in March 2024, an agreement was signed with an automobile manufacturer to cooperate in the development of oversized magnesium alloy integrated die castings. It will strongly promote the further large-scale application of magnesium alloys in the field of large and complex structural parts, and is of strategic significance for the application of magnesium alloys to oversized components in the automotive, construction, aerospace and other industries;

Investment advice: Although the company's performance declined in 2023 due to low magnesium prices, thanks to lower raw material prices, deep-processing products continued to penetrate the downstream sector. In the long run, we believe that the fluctuation in the magnesium price cycle should be gradually reduced, and that the company's overall industrial chain layout advantages should be emphasized. In the process of continuous acceleration of application and promotion in the fields of automobiles, construction, hydrogen storage, etc., the company is expected to fully benefit. The company is expected to achieve operating income of 97/128/15.1 billion yuan in 2024-2026, up 27%/32%/18% year on year, and achieve net profit of 4.1/7.1/970 million yuan, up 32%/76%/36% year on year, corresponding to PE32X/18X/13X, maintaining the “buy” rating.

Risk warning: Downstream demand recovery falls short of expectations, project commissioning falls short of expectations, raw material prices fluctuate, etc.