Key points of investment:

Incident: The company released its 2023 report and 24Q1 quarterly report. 23 achieved revenue of 19.41 billion yuan, -4.9% year over year (after adjustment), mainly due to falling zinc prices and falling revenue of zinc and zinc alloys; net profit to mother of 611 million yuan, +24.0% year over year (after adjustment). 24Q1 achieved revenue of 4.43 billion yuan, -1.6% YoY; realized net profit of 159 million yuan, +13.4% YoY.

2023: The completion of the Mizuguchiyama limited merger and acquisition led to a significant increase in performance. Volume: Zinc and zinc alloy production in '23 was 662,000 tons, +2.2% year on year; 107,000 tons of lead and lead alloy, -2.8%; gold production was 3.4 tons, +122.6% year on year; silver production was 320.1 tons, +18.7% year on year. Price: The average price of gold in '23 was 450 yuan/gram, +58 yuan/gram; silver was 5,561 yuan/kg, +841 yuan/kg; the average price of zinc was 21,500 yuan/ton, -30,000 yuan/ton, including split processing costs of 0.62 million yuan, +0.03 million yuan/ton; the average price of lead was 15,800 yuan/ton, which was basically the same as year on year. Profit: Shuikoushan merged for the first year in '23. The company achieved gross profit of 1.66 billion yuan and a gross profit margin of 8.5%. Among them, gold achieved gross profit of 285 million yuan, accounting for 17.2%, achieving a gross profit margin of 21.2%; silver achieved gross profit of 319 million yuan, accounting for 19.3%, achieving a gross profit margin of 22.7%; and zinc and zinc alloy achieved gross profit of 737 million yuan, accounting for 44.5% of gross profit margin.

2024:24Q1 achieved gross profit of 392 million yuan, +0.44/+64 million yuan, respectively. Among them, 24Q1 zinc smelting and processing costs were -678 yuan/ton month-on-month, causing a partial drag. The rise in gold and silver prices will continue to drive profit release in the future. In 2024, the company will rely on lead-zinc mineral resources and the advantages of a complete lead-zinc mining and smelting production line to implement a two-wheel drive development strategy for lead-zinc mine resource development and lead-zinc non-ferrous metal smelting and processing. The target content target is 41,700 tons of zinc concentrate, and the production and sales target for zinc products is 642,000 tons, including 487,800 tons of zinc alloy; the production and sales target for lead products is 100,000 tons, including 55,000 tons of lead alloys.

Profit forecast and investment suggestions: We have adjusted the gold price and zinc concentrate processing fee. Assuming 1.9/2.0/2.0 tons of self-produced gold ore in 2024-2026, we expect to achieve net profit of 7.1/8.3/82 billion yuan in 2024-2026 (the previous value was 88/910 million yuan). The corresponding EPS is 0.66/0.77/0.76 yuan/share, respectively, corresponding to the current PE of 17/14/14X. It is still an underestimated gold label. The 2024 industry average 21X valuation corresponding to the target price 13.87 yuan/share, maintaining a “buy” rating.

Risk warning: the price of gold falls short of expectations, production safety risks