Incident: The company achieved operating income of 4.075 billion yuan in the first half of 2024, an increase of 15.37% year on year; net profit attributable to shareholders of listed companies was 0.12 billion yuan, a decrease of 1.28% year on year.

Comment: Volume compensation revenue increased year-on-year, and the decline in magnesium prices dragged down performance. According to the company announcement, the year-on-year increase in the company's revenue was mainly due to an increase in product sales. According to WIND data, the average price of magnesium ingots in the first half of 2024 was 0.0205 million yuan/ton, -14.1% year-on-year. As of July 30, 2024, the price of magnesium ingots was 0.0194 million/ton, down 11.7% from the beginning of the year. The decline in magnesium prices dragged down the company's performance.

The price ratio of magnesium to aluminum has been below 1.5 for 14 consecutive months, and Huichuan released magnesium alloy electric drive products. According to WIND data, as of July 30, 2024, the magnesium-aluminum price ratio has declined to 1.03, and the ratio has been below 1.5 for 14 consecutive months. The price ratio of magnesium to aluminum has been low for a long time or is beneficial to downstream promotion. On July 3, 2024, the company and Suzhou Huichuan United Power System Co., Ltd. jointly released a magnesium alloy lightweight electric drive assembly, which reduces weight by 2.5-7 kg and increases motor power density compared with traditional aluminum alloy material structures. According to the company announcement, the average amount of magnesium alloy bicycles used in China in 2022 is 3-5 kg, and the subsequent promotion of large parts in the industry is expected to increase the amount of magnesium used in bicycles.

The raw material side is fully guaranteed, and the low-altitude economy expands imagination in new application areas: by the end of 2023, the company had abundant dolomite resource reserves, with nearly 90 million tons in Chaohu Lake in Anhui, 1.3 billion tons, and five units with 0.58 billion tons; Gansu Baomei has begun construction of a high-quality ferrosilicon project with an annual output of 0.3 million tons. The company signed a cooperation agreement with Xiaopeng Flying Motor to become a designated supplier for key components such as instrument panel tube beam assemblies and middle channel left and right lower bracket assemblies. The company is a second-tier supplier to DJI. In addition, the company is also in negotiations with other car manufacturers to cooperate with other car manufacturers for vehicle-mounted drone lifting platforms.

The shareholder return plan for the next three years further consolidates the company's investment value. According to the company's announcement on April 25, 2024, when the cash dividend conditions are met, the company's cumulative profit distributed in cash for any three consecutive fiscal years is not less than 30% of the average annual distribution profit achieved in those three years. After comprehensively considering factors such as the characteristics of the industry in which it is located, its own business model, profit level, and whether there are major capital expenditure arrangements, when the company's development stage is mature and there are no major capital expenditure arrangements, cash dividends should account for at least 80% of the current profit distribution.

Profit forecast and rating: Considering the decline in magnesium prices, we lowered our profit forecast. We expect net profit to be 0.315 billion yuan/0.597 billion/ 0.887 billion yuan for 2024-2026, a decrease of 32.0%/23.5%/25.0%, corresponding to the 2024-2026 PE of 32X/17X/11X. In view of the advantages of the company's integrated layout and the synergy effects after Baosteel Metal entered the market, we maintained an “gain” rating.

Risk warning: downstream demand falls short of expectations; industry supply is released too fast; magnesium prices fall; company project construction falls short of expectations; safety and environmental protection risks; risk of changes in downstream technology paths, etc.