Incident: In 2023, the company's net profit to mother was 420 million yuan, minus non-net profit of 250 million yuan, -67.5% YoY, 2024Q1 net profit to mother - 290 million, -365% YoY. At the end of 2023, the company acquired 94.67% of Zhongxi Hunan's shares and completed the transfer. This was a merger of enterprises under the same control and required retroactive adjustments to previous financial data, so net profit returned to mother was adjusted from 420 million to 770 million yuan in 2022.
The company's smelting performance in 2023 was affected by a drop in rare earth prices, and preparations were made for large inventory price drops in 24Q1.
1) The company's rare earth mining business performance was good in 2023: in 2023, the company's rare earth ore production/sales volume was 2384/1931 tons, +27.6%/+10.8%, and production and sales increased. At the same time, the company's rare earth gross margin fell only slightly by 3 pct to 78.1%. In the end, the total gross profit of rare earth minerals was about 40 billion yuan, +16% year over year. 2) The separation and smelting business was dragged down by the decline in rare earth prices: in 2023, the company's rare earth oxide production/sales volume was 3756/3622 tons, +2.5%/-6.1% year over year. Also affected by the decline in rare earth prices (the average annual sales price of praseodymium oxide was about 530,000 yuan/ton, down about 36% year on year), the gross margin of the smelting and separation business fell 11 pct to 15.6%. The gross profit of the company's rare earth oxide sector in 2023 was 380 million yuan, -56% year on year. 3) 2024Q1 calculated large asset impairment losses. The average price of rare earths in 24Q1 continued to fall, and the average price of praseodymium oxide fell to 380,000 yuan/ton, -43% YoY and -22% month-on-month. Due to prudential principles, the company prepared a total of 350 million yuan for the 2024Q1 inventory drop.
The resource advantage is remarkable. The company is expected to benefit from continued group integration in the future. 1) The company has significant resource advantages: the subsidiary Zhongxi Hunan Jianghua Rare Earth Mine holds 26,727 tons of resources (TREO). In addition, the company is handling Shenggongzhai rare earth ore exploration and transfer work. Currently, the mine's geological environment protection and land reclamation plan has been reviewed by the Ministry of Natural Resources, and the Feitian rare earth mining prospecting rights work has also begun. 2) Continued breakthroughs in group integration work: In 2023, China Rare Earth Group, the actual controller of the company, fully completed the integration of medium and heavy rare earth resources. Currently, the domestic rare earth indicators are controlled by Northern Rare Earth and China Rare Earth, and the first batch of rare earth indicators obtained by China Rare Earth in 2024 is +3.5%. In the future, as the core listing platform of China Rare Earth Group, the company is expected to benefit from group integration.
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 be 3.5/5.3/680 million in 2024-2026. Considering that the company is the core target of medium and heavy rare earths in China, 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.