Incident: In 2023, the company's net profit to mother was 200 million yuan, -12.5% year-on-year, after deducting non-net profit of 138 million yuan, -44% year-on-year; the company's net profit to mother for the first quarter of 2024 was -30 million yuan.

The company released rare earth ore in 2023, and the decline in rare earth prices dragged down the overall performance. 1) Trade business has been reduced, and the revenue structure has been optimized: in 2023, the company's revenue was 20.81 billion yuan, down 9% year on year, of which commercial revenue was 18.56 billion, -11.8% (mainly trade business), while industrial revenue was 2.25 billion yuan (mainly rare earth production business), +23% year over year. Considering that the gross margin of the trade business was only 0.53%, the scale of pressure reduction trade actually optimized the company's business structure; 2) The company's rare earth mineral sales increased, and Chinese enterprise performance released: in 2023 the company's rare earth ore production/sales volume was 2458/2721 Tons, +61%/324% year over year, achieved significant expansion, mainly due to Chinese enterprise companies' rare earth production breakthroughs, with net profit of 140 million yuan in 2023, +73% year over year; 3) Separation sector performance is expected to be dragged down by rare earth prices: the company's rare earth oxide production/sales volume was 3552/2647 tons, respectively, -3.5%/-4.5% YoY. At the same time, rare earth prices declined in 2023. The average price of praseodymium oxide fell 34% year on year, terbium oxide fell 34%, and dysprosium oxide fell 9%, which is expected to put some pressure on the performance of separation companies.

4) The continued decline in 24Q1 rare earth prices caused the company to calculate large-scale asset impairment losses: the 24Q1 rare earth price continued to fall, such as the average price of praseodymium oxide falling to 380,000 yuan/ton, which weakened the company's profitability (24Q1 company's overall gross margin fell to -1.57%). At the same time, the company planned about 310 million inventory price drop preparations, which also affected 24Q1 performance.

Actively expand the upstream mine+downstream magnetic material side to create the advantages of the whole industry chain: 1) Upstream mining:

Currently, the company is speeding up the Xinfeng rare earth mining project into the development stage; Huaenterprise has achieved a steady increase in production and accelerated the magnesium-salt process and EIA changes; and the Dapu Company has completed the construction of land leased and installed in Zhengshan in the three mining areas of the Wufeng rare earth mine. 2) Downstream magnetic materials: Shengyuan's high-end permanent magnet project (Phase I) was successfully put into trial production in January 2023, and the full line will be completed within 2023, which will increase capacity utilization in the future; at the same time, Dongdian Chemical's NdFeB Phase II construction project has successfully started.

The medium- to long-term supply and demand pattern for rare earths is good, and we are waiting for rare earth prices to rise steadily. On the one hand, domestic indicators are strictly control+overseas growth is relatively limited, and the supply of rare earths is relatively limited. On the other hand, new energy vehicles, industrial motors, robots, etc. are still expected to bring a large increase in demand in the future, and the medium- to long-term supply and demand pattern for rare earths is good.

Profit forecast and investment advice: The company's net profit is expected to return to mother in 2024-2026 of $3.0/4.4/5.1 billion. Considering the good layout of the company's rare earth industry chain, the company is given an “increase in wealth” rating.

Risk warning: rare earth prices fluctuate, domestic indicators exceed expectations, profit forecasts fall short of expectations.