The company's net profit to mother fell 50% year over year in 2023. In 2023, the company achieved revenue of 7.65 billion yuan (-16.0%), net profit attributable to mother of 306 million yuan (-49.8%), net profit without return to mother of 305 million yuan (-47.2%), and net operating cash flow of 350 million yuan (-73.9%). Among them, the 2024Q1 single quarter revenue was 1.86 billion yuan (+10.0% YoY), net profit attributable to mother was 61 million yuan (+19.9% YoY, -38.7% YoY), net profit of 60 million yuan (YoY +32.7%, 47.6% YoY). The company's profit decline was mainly due to falling magnesium prices. The average annual price of magnesium ingots reached 30,655 yuan/ton in 2022 and fell to 22,234 yuan/ton in 2023. The gross margin of the company's magnesium alloy products fell from 29.14% in 2022 to 18.08% in 2023.

The company is in a period of accelerated expansion of production capacity. The company currently has 100,000 tons of raw magnesium production capacity and 200,000 tons of magnesium alloy production capacity. The subsidiaries Wutai Yunhai and Chaohu Yunhai were all selected for the magnesium industry standard enterprise list announced by the Ministry of Industry and Information Technology in November 2020 (first batch). The company is building 50,000 tons of raw magnesium production capacity in Chaohu Lake, 100,000 tons of raw magnesium production capacity in Wutai, and 300,000 tons of raw magnesium production capacity in Qingyang. As production capacity is reached in various regions, the company will have a scale of 550,000 tons of raw magnesium and 600,000 tons of magnesium alloys.

The cost performance ratio of magnesium materials is outstanding, and the company's profit is highly profitable and flexible with respect to magnesium prices. In the past 12 years, the price of magnesium was 1.2 times the price of aluminum, and by April 2024, it had fallen to around 0.9. The price of magnesium has now returned to a reasonable range, and the cost performance advantage of magnesium over aluminum has once again been shown. The company's magnesium smelting production capacity is 100,000 tons in 2023. After the future production capacity reaches 550,000 tons, the flexibility with regard to magnesium prices will become more obvious. Referring to the capacity regulation policy of the electrolytic aluminum industry, if magnesium smelting capacity expands in an orderly and controllable manner in the future, industrial chain profits will be concentrated on the smelting process for such products without resource bottlenecks. The company has huge magnesium smelting production capacity, which will significantly benefit from the upward trend in magnesium smelting profits.

Risk warning: Risk that project construction progress falls short of expectations; risk of rising raw material costs or falling magnesium prices; increased risk in the magnesium alloy and aluminum alloy deep processing product market competition.

Investment advice: Maintain a “buy” rating.

Assuming that the price of magnesium alloys in 2024-2026 is 22,000 yuan/ton, the net profit for 2024-2026 is expected to be 4.52/6.59/812 million yuan, a year-on-year growth rate of 47.5%/45.9%/23.1%; diluted EPS is 0.64/0.93/1.15 yuan, respectively, and PE corresponding to the current stock price is 28/19/16x, respectively. The company is an integrated leader in the global magnesium industry chain. Currently, it is in the project construction period and production capacity expansion period. It is highly profitable and flexible for magnesium prices. Currently, magnesium prices have returned to a reasonable range and have an obvious cost performance ratio. We are optimistic about the application of magnesium in solid state energy storage, large components in automobiles, large integrated die-casting parts, building templates, etc., and maintains a “buy” rating.