Core views

The company is a leading domestic producer of rare earth permanent magnets and a single champion enterprise. The company's leading customer coverage rate is high, with an average coverage rate of 90% for the TOP10 international car brands, TOP5 autonomous car brands, and the TOP5 new car builders; 100% coverage of the world's top 5 automotive electrification brands such as EPS; and 100% coverage of the top 5 global inverter air conditioning compressor brands. The company's share of overseas revenue and gross profit reached 36% and 58%, respectively. The company currently has a rare earth permanent magnet production capacity of 30,000 tons/year. By 2026, it will achieve a production capacity scale of 36,000 tons/year, and its performance will be released steadily.

occurrences

Net profit to mother fell 33.66% in the first quarter.

In the first quarter of 2024, Zhenghai Magnetic Materials achieved total operating income of 1,173 billion yuan, a year-on-year decrease of 14.76%, a year-on-year decrease of 33.66%; gross profit margin of 15.38%, a year-on-year decrease of 2.80 percentage points, achieving basic earnings per share of 0.10 yuan, a year-on-year decrease of 28.57%, a year-on-year decrease of 1.98%, and a year-on-year decrease of 1.16 percentage points.

Brief review

Leading manufacturer of rare earth permanent magnets, single champion enterprise.

The company is the first leading rare earth permanent magnet company in the industry to serve the new energy, energy saving, and intelligent markets. It has formed a positive situation with balanced development in the automotive market and in all other major application fields. It is a single champion enterprise in the national manufacturing industry for high-performance sintered NdFeB permanent magnets for new energy vehicles as recognized by the Ministry of Industry and Information Technology. In 2023, the company's high-performance NdFeB permanent magnet material products were equipped with 4.49 million sets of energy-saving and new energy vehicle motors, an increase of 29% over the previous year. Grain Optimization Technology (TOPS) related products covered 90% of the company's products; heavy rare earth diffusion technology (THRED) related products covered more than 80% of the company's products.

Leading customers achieved a high coverage rate, and overseas regions contributed a high proportion of gross profit.

The company's average coverage of the TOP10 international automobile brands, the TOP5 autonomous car brands, and the TOP5 new car building brands reached 90%; 100% coverage of the world's top 5 automotive electrification brands such as EPS; and 100% coverage of the top 5 global inverter air conditioning compressor brands. The company has established 5 production bases in China and set up subsidiaries in Germany, Japan, South Korea, the United States and Malaysia. The company's overseas customer revenue accounts for 36%, and the gross profit of overseas customers accounts for 58% of the total gross profit.

Production capacity is expanding steadily, and capacity utilization continues to increase

The company currently has a rare earth permanent magnet production capacity of 30,000 tons/year, including 10,000 tons/year in the East-West factory area and 8,000 tons/year in the Fuhai plant. The production capacity of the second phase of the Nantong base has been expanded to 12,000 tons/year. The East-West factory area and Fuhai factory area maintained a high capacity utilization rate of 88% in 2023. After the construction and commissioning of the Nantong base, capacity is still climbing, with a capacity utilization rate of 46%. The production capacity of the third phase of the Nantong base of 6000 tons/year is scheduled to be fully completed by 2026. The company's production capacity will reach 36,000 tons/year. The newly built production capacity will steadily release performance in the future, laying a solid foundation for the company's performance growth.

Profit forecast and investment suggestions: The company currently has the highest rare earth permanent magnet production capacity in China. By 2026, it will achieve a scale of 36,000 tons/year. The coverage rate of leading customers is high, overseas regions contribute a high proportion of gross profit, and the company's performance is growing steadily. It is estimated that in 2024-2026, the company will achieve operating income of 65.9/86.8/9.74 billion yuan, and achieve net profit of 5.2/6.7/78 billion yuan, corresponding PE of 15/12/10 times, which is lower than the industry average. It is covered for the first time, and a purchase rating is given.

Risk warning: 1. The company's raw materials are rare earth oxides, etc., and the price fluctuates greatly, and there is a risk of raw material depreciation. If the gross profit per ton falls by 1/2 million yuan/ton due to raw material impairment, the corresponding net profit falls 38%/75%, so the decline in rare earth prices causes the company's raw material impairment to have a great impact on performance; 2. If the project construction and commissioning progress falls short of expectations, or affects the company's future performance expectations, the company's production and sales volume will drop 5.0%/15.0%/25.0% compared to expectations, which will cause the company's revenue to drop 4.9%/9.8%/14.8%, net Profit fell 4.9/ 9.9%/14.8%; 3. If the production capacity of the NdFeB rare earth permanent magnet industry expands too fast, or it may cause industry competition to intensify, affecting the company's profitability.