Investment logic
Industry leader, promoting terminal applications. The company is the world's largest rare earth enterprise with the highest output value and the best efficiency. The company is state-owned holding, and the controlling shareholder is Baogang Group; in addition to the rare earth raw materials business, the company actively lays out magnetic materials and motor businesses. After a continuous decline in rare earths in the 2021-2024Q1 period, the company's net profit for 1Q24 was only 52 million yuan, the lowest value in the past 5 years and a record low in the past 10 years.
Rare earths: Supply and demand are expected to reverse, and prices are starting to rise. The index for the first batch of mineral products in 2024 was +12.5% year-on-year, which is significantly lower than in previous years; in March 2024, domestic imports of praseodymium oxide fell 2% year on year, and imports weakened as scheduled. However, the “equipment renewal” and “trade-in” initiatives are expected to contribute more than expected increases in the industrial motor sector. We estimate that the 2023-2026 CAGR is 101%, 65%, and 44%, respectively, under optimistic, neutral, and conservative assumptions; under the continuing boom in new energy vehicles, the overall demand for rare earths in 2024-2026 is 11%/12%/13%, respectively. We estimate that the full year of 2024 quota growth will be 12%, or the balance between supply and demand. As of May 13, the spot price of praseodymium oxide was 410,000 yuan/ton, up 18% from the bottom; Northern Rare Earths also raised the listing price to 393,200 yuan/ton in May, +7.5% month-on-month, which is of great significance in boosting industry confidence.
Relying on Baiyun Ebo, enjoy the advantages of low cost. Baogang Group, the controlling shareholder of the company, has exclusive mining rights for Baiyun Ebo Mine, the world's largest rare earth mine. Since 2017, through related transactions, the brother company Baogang Co., Ltd. has supplied rare earth concentrates to the company; since 2023Q1, the rare earth concentrate pricing method and price adjustment mechanism have been implemented in accordance with the resolution of the company's 2023 First Extraordinary General Meeting of Shareholders. The company's gross margin is significantly higher than that of its peers, and has remained at 20% or above for the past 10 years. In a situation where prices are bullish and cost pricing is lagging behind, we think the company can expect a significant recovery in gross margin. The company's mining index CAGR reached 34% in 2020-2023; in 2024, the first batch of mining indicators accounted for 70%, and the proportion increased year by year, and the leading position was stable.
Performance flexibility is high, and high dividend potential further enhances investment value. When the price of praseodymium oxide increases by 10%/30%/50%/100%, even if the amount of quota remains unchanged, the company's net profit to mother is +48%/105%/162%/303%, respectively, compared to 2023, and the performance is more flexible.
While the company still has rich reserves of undistributed profits, and the policy side encourages dividends under the current capital expenditure scale, the company, as a state-owned rare earth leader, still has high potential for dividend rights, thereby increasing the company's investment value. The company's dividend ratio for 2023 was 10.67%.
Profit forecasts, valuations, and ratings
The company's revenue for 2024-2026 is estimated to be 364/429.5 billion yuan, and the net profit to be realized is 27.41/59 billion yuan, EPS is 0.74/1.13/1.62 yuan, respectively, and the corresponding PE is 27/17/12 times, respectively. Considering the company's leading rare earth position and comparable company valuation level, the company was given 45 times PE in 2024, with a target price of 33.3 yuan. The first coverage gives a “buy” rating.
Risk warning
Fluctuating product prices; risk of quota fluctuations; demand falling short of expectations.