Key points of investment

The performance was in line with expectations. The company's 24-year H1 revenue was 30.1 billion yuan, down 10%; net profit to mother was 1.67 billion yuan, down 20%; of which Q2 revenue was 15.1 billion yuan, +6%/+1% compared to the same period, and 1.15 billion yuan to mother, +8%/+120% year-on-month, after deducting non-net profit of 1.18 billion yuan, +40%/+109% year-on-month, gross profit margin 21%, +8pct/+9pct compared to the same period. The company previously predicted 24H1 net profit of 1.5-1.8 billion yuan. The results were in the median forecast, in line with expectations.

Shipments of the precursor Q2 increased significantly month-on-month, and profits remained stable. The company shipped 0.067 million tons of 24H1 precursors (including self-supply), an increase of about 11%. Among them, we expect Q2 to ship nearly 0.04 million tons, an increase of about 50%, and we expect to ship 0.15 million tons for the whole year, an increase of about 16%; on the profit side, Huayou New Energy's 24H1 net profit of 0.08 billion yuan, corresponding to a net profit of 0.0012 million yuan per ton. The company shipped 0.053 million tons of cathodes (including self-supply), with a slight year-on-year decline. Among them, Q2 shipped about 0.029 million tons, an increase of more than 20%; on the profit side, Chengdu Bamo 24H1 made a profit of 0.1 billion yuan, corresponding to a net profit of nearly 0.002 million yuan per ton of cathode. Furthermore, the company's assets such as Leyou and Puhua can be gradually released, contributing part of the investment income.

Profit per unit increased as nickel prices rose in Q2, and the Huafei project contributed significantly to production. On the nickel smelting side, the company's 24H1 nickel intermediate shipments were about 0.112 million tons, an increase of more than 90%, and shipments of nickel products were about 0.076 million tons (including self-supply), an increase of more than 40%. Among them, the Huafei Project achieved 0.12 million tons of MHP in March. We expect annual nickel smelting shipments to be around 0.24 million gold tons (equity 0.13 million gold ton+), and the equity increase of 0.02-0.03 million tons over 25 years. On the profit side, Huayue, Huake, and Huafei 24H1 had a total net profit of 1.6 billion yuan. The company placed a net profit of about 0.0035 million+ per ton. Among them, the Q2 nickel price once rebounded to 0.02 million/ton+, and the profit per ton is expected to rise to 0.004 million US dollars+. Nickel prices have been lowered to the bottom of 0.016-0.017 million US dollars in August. Considering the tightening of approval of nickel ore quotas in Indonesia and the reduction in nickel smelting production capacity in other regions, there is room for overall nickel prices to rebound in the future. Based on 0.016-0.017 million US dollars, nickel smelting is expected to contribute about 2.5-3 billion yuan to net profit for the whole year.

The profit elasticity of the copper business is remarkable, and the cost reduction of lithium mine projects contributes to profits. We expect to ship about 0.025 million tons of copper products in Q2, of which our own mines are expected to be around 0.005 million tons, and the combined pure processing portion will contribute 0.2 billion yuan+ profit. We expect to ship 0.1 million tons as a whole in 24, including 0.02 million tons of our own mines, contributing a total profit of about 0.5-1 billion yuan. The total cost of the Arcadia lithium project was reduced to 0.085 million yuan (tax included). We expect to ship about 0.018 million tons of H1 lithium carbonate and 0.025-0.03 million tons for the whole year, reversing the loss in Q2, but considering that 2H lithium prices fell below 0.08 million yuan, we expect a loss for the whole year; 24H1 cobalt products shipped about 0.023 million tons, an increase of about 13%. Our own mines can achieve partial profits.

Q2 Operating cash flow improved significantly, and capital expenditure slowed. The 24H1 investment income was 0.44 billion yuan, Q2 was 0.25 billion yuan, an increase of 34%; the cost rate during the 24Q2 period was 9.6%, +4.5/+0.8 pct compared to the previous month.

24H1's net operating cash flow was 2.8 billion yuan, up 54% from the same period, of which 24Q2 net operating cash flow was 1.8 billion yuan, +87%/+97% year-on-month. Q2 capital expenditure was 1.7 billion yuan, -55%/-21% YoY.

Profit forecast and investment rating: Due to the rise in nickel prices in Q2, we raised our 2024 profit forecast, and we expected nickel prices to remain in the bottom range in 25-26. We lowered our 2025-2026 profit forecast. We expect the company's net profit to mother of 3.6/4/4.4 billion yuan (originally expected 3.5/4.6/5.7 billion yuan) in 2024-2026, an increase of 9%/10%/10%. The corresponding PE is 10.4x/9.5x/8.6x. Considering the significant advantages of the company's integration, we will give 24x 15x PE, with a target price of 32 yuan, maintains a “buy” rating.

Risk warning: Prices of upstream raw materials have fluctuated greatly, and sales of electric vehicles have fallen short of expectations.