Event: On July 30, 2024, the company released its 2024 semi-annual report. 2024H1 achieved revenue of 4.075 billion yuan, a year-on-year increase of 15.4%, and realized net profit to mother of 0.12 billion yuan, a decrease of 1.3% year-on-year. Looking at 2024Q2 in a single quarter, the company achieved operating income of 2.212 billion yuan, a year-on-year increase of 20.3%, a year-on-month increase of 18.7%, and a net profit of 0.059 billion yuan to mother, a decrease of 16.5% year-on-year and 2.7% month-on-month. The performance was in line with our expectations.

Net profit from 2024Q2 decreased by 1.65 million yuan month-on-month, but gross profit increased by 40.33 million yuan month-on-month, mainly due to the release of magnesium alloy products and aluminum alloy deep-processing products. ① Price: The price of magnesium products decreased year-on-year. The price of 2024Q2 magnesium ingot/magnesium alloy was 0.0185/0.0203 million/ton, respectively, a decrease of 5.1%/5.1% month-on-month and 19.9%/20.2% year-on-year, respectively. ② Production and sales volume: The Qingyang project was put into operation at the end of 2023. As production capacity climbed, the company's magnesium product production and sales increased year-on-year, so H1 magnesium alloy revenue continued to grow year-on-year even as sales prices declined month-on-month. ③ Cost: The cost of ferrosilicon increased, but prices declined in July, and the cost pressure may decrease in Q3. The price of 2024Q2 ferrosilicon was 7030 yuan/ton, down 4.5% year on year and 6.3% month on month. The price of coal in Kengkou, Yulin was 739 yuan/ton, down 10.6% year on year and 2.0% month on month.

On a month-on-month basis, the profit reduction was mainly due to an increase of 23.93 million yuan in expenses and taxes. In terms of breakdown, the increase in R&D expenses was 26.91 million yuan month-on-month, and the increase in R&D investment may help subsequent companies develop more magnesium alloy applications. In addition, profit deductions include a month-on-month increase in credit impairment losses of 36.46 million yuan, mainly due to an increase in accounts receivable due to an increase in sales of extruded aluminum products in the second quarter, and a corresponding increase in bad debt losses.

Take a look at the subsidiary companies. 2024H1 also accounts for the highest share of profits of Wutai Yunhai. Against the backdrop of a year-on-year decrease in magnesium prices, thanks to falling raw material costs, Wutai Yunhai 2024H1's net profit increased by 3.74 million yuan to 79.38 million yuan year-on-year. Chaohu Yunhai lost money under current magnesium prices due to higher costs compared to five Yunhai units. The net profit of 2024H1 decreased by 67.69 million yuan to -11.51 million yuan over the same period last year, making it the largest profit reduction subsidiary.

Core highlights: ① The entire industry chain is covered, and the resource advantages are remarkable. The company has rich dolomite resources, and all three magnesium alloy production bases are equipped with dolomite mining rights. ② The company's production capacity has broad room for growth. In the Qingyang, Chaohu, and Wutai projects, the Anhui Aluminum 0.15 million ton aluminum extrusion profile project continues to advance. As the project gradually reaches production, the company will have 0.5 million tons of raw magnesium and 500,000 tons of magnesium alloy production capacity in 2025. ③ Plan a 0.3 million ton ferrosilicon project to further strengthen the cost advantage. After the project is put into operation, the company will achieve self-sufficiency in ferrosilicon in the Qingyang project, which will help the company further reduce raw magnesium production costs and improve competitiveness. ④ The average magnesium-aluminum ratio of 2024H1 is 1.04, which is below the reasonable range of 1.1-1.3. Downstream acceptance has increased, and magnesium demand has blossomed more. Magnesium construction templates, automobile weight reduction, magnesium hydrogen storage are making efforts in many fields, and magnesium application prospects are broad.

Profit forecast and investment advice: Considering the decline in magnesium prices, we lowered the company's profit forecast. We expect the company to achieve net profit of 0.361/0.732/0.951 billion yuan in 2024-2026, respectively, and EPS of 0.36/0.74/0.96 yuan/share, respectively. PE corresponding to the closing price on July 31 was 28/14/11X, respectively, maintaining a “recommended” rating.

Risk warning: Metal prices fluctuate, production capacity investment falls short of expectations, downstream demand release of magnesium falls short of expectations, etc.