Sales of products such as magnesium increased. In the first half of 2024, the company's product sales volume increased, revenue increased year-on-year, and the increase in sales made up for the decline in product prices. The company currently has rich dolomite resource reserves, with nearly 90 million tons in Chaohu Lake in Anhui, 1.3 billion tons in Qingyang, Anhui, and 0.58 billion tons. It is mainly used in magnesium metal, glass, steel manufacturing and construction industries. In addition, the company has four major raw magnesium and magnesium alloy production bases in Chaohu, Qingyang, Wutai, and Huizhou, all of which have a raw magnesium and magnesium alloy production capacity of 0.5 million tons/year after delivery.

Increased sales boosted revenue, and gross margin increased year over year. In the first half of 2024, the company achieved revenue of 4.075 billion yuan, an increase of 15.37%, mainly due to increased sales of magnesium and aluminum alloy deep-processing products. Among them, revenue from magnesium alloy products was 1.242 billion yuan, an increase of 3.53%; revenue from magnesium alloy deep processing products was 0.533 billion yuan, up 21.29%, or due to increased sales of products such as magnesium templates; revenue from aluminum alloy products was 0.479 billion yuan, a decrease of 15.91%; revenue from aluminum alloy deep processing products was 1.201 billion yuan, an increase of 60.19%, mainly due to the company's expansion of deep processing business in the current period; and revenue from intermediate alloys was 0.41 billion yuan, up 33.44%. The company's overall gross profit margin was 11.85%, an increase of 0.13pct.

Among them, the gross profit margin of magnesium alloy products was 14.31%, a decrease of 0.11 pct; the gross profit margin of magnesium alloy deep processing products was 13.43%, an increase of 5.50 pct; the gross profit margin of aluminum alloy products was 8.91%, an increase of 5.00 pct; the gross profit margin of aluminum alloy deep processing products was 10.62%, an increase of 0.63 pct; and the gross profit margin of intermediate alloys was 2.30%, the same decrease of 0.10 pct.

Expense rates increased during the period, and net profit declined year-on-year. The company's expense ratio for the first half of 2024 was 8.72%, up 1.03pct. Among them, the sales expense ratio was 0.37%, the main reason was the increase in sales volume and the increase in advertising and personnel expenses; the management expense ratio was 2.22%, 0.27 pct, mainly due to the increase in depreciation and amortization expenses in the current period; the R&D expense ratio was 4.89%, the main reason was the increase in R&D project investment in the current period; and the financial cost ratio was 1.24% and 0.01 pct. In the first half of the year, the company's two impairment losses totaled 12.0843 million yuan, an increase of 35.634 million yuan, mainly due to inventory price drop losses calculated during the same period last year. Taken together, the company achieved net profit of 0.1198 billion yuan in the first half of 2024, a year-on-year decrease of 1.28%.

Cash flow has deteriorated and debt ratios have risen. In the first half of the year, the company's revenue ratio was 0.8428, down 9.35 percentage points; the payout ratio was 0.8246, down 4.42 percentage points from the same period. Taken together, the net operating cash inflow was 0.12 billion yuan, a year-on-year decrease of 0.174 billion yuan, mainly due to a decrease in customer payments received in the current period compared to the same period last year and an increase in inventory. The net cash outflow from investment activities was 1.079 billion yuan, an increase of 0.507 billion yuan over the previous year, mainly due to the increase in fixed asset investment in the current period.

The company's balance ratio was 51.02%, up 3.62 percentage points from the end of last year. In addition, the company cooperated with Hydrofeng Energy to produce and process magnesium-based solid hydrogen storage magnesium alloys; the subsidiary Chongqing Boao Magnesium-Aluminum Metal Manufacturing Co., Ltd. signed a large-scale agreement with an automobile manufacturer to cooperate in the development of magnesium alloy integrated die-castings.

Investment advice: The company is actively expanding downstream applications and is expected to land large-scale magnesium alloy die-casting orders in the future. Considering the recent drop in magnesium prices, we expect the company's net profit to be 0.311, 0.408, and 0.581 billion yuan in 2024-2026, corresponding to PE of 32.6, 24.8, and 17.5 times, maintaining a “highly recommended” rating.

Risk warning: Downstream demand falls short of expectations, and magnesium prices fluctuate greatly.