Lead-zinc ore is rich in resource reserves, and mergers and exploration efforts are being made to increase resource reserves. Jinhui Co., Ltd. focuses on the extraction business of zinc concentrate and lead concentrate (silver containing silver). The resources are mainly the Xicheng lead-zinc ore field in the West Qinling Lead-Zinc Metallogenic Belt. By the end of '23, the company had resources of 59.79 million tons of lead and zinc ore, with a lead grade of 0.91%-1.58%, and a zinc grade of 3.10-3.51%. Based on the advantages of basic resources in the region where it is located, the company has increased reserves of high-quality lead-zinc mineral resources through mergers and acquisitions and exploration. In 2023-2024, the company successively completed the acquisition of 100% shares in the Xiejiagou mine and the Xiangyangshan mine, and auctions obtained prospecting rights for the Dongpo lead-zinc mine in Huixian County, Gansu Province (holding resources of 0.0134 million metal tons and 0.0163 million metal tons of zinc) and mining rights in the empty area on the south side of the Luoba lead-zinc mine in Huixian County, Gansu Province (holding resources of 4231 metal tons of lead and 0.0137 million metal tons of zinc). Up to now, the company's mineral rights include 4 mining rights, 4 prospecting rights, 5 beneficiation plants and supporting tailings depots, and the prospecting rights have good geological conditions for mineralization. Through increased exploration investment, it is expected that resource reserves that can be developed and used can be obtained.

By integrating the resources of the Jiangluo mining area, the mineral processing capacity is expected to gradually increase by 3 million tons/year, and the performance will enter a period of rapid improvement. As of the end of the first half of 2024, the company's production capacity of selected lead-zinc ore was 1.78 million tons/year, of which Guojiagou mine, Xiejiagou mine, and Xiangyangshan mine had production capacity of 150, 180,000 tons/year, respectively. In 2023, the company produced 0.064 million tons of zinc concentrate and 0.021 million metal tons of lead concentrate (containing silver). 24 Product production increased in the first half of the year. The production of zinc concentrate and lead concentrate (containing silver) was 0.031 million tons and 0.011 million tons, respectively, +12.5% and +12.9% compared with the same period last year. In order to expand resources and strengthen the main business, in August 2023, the company and the Huixian County People's Government signed a “Strategic Cooperation Framework Agreement” to integrate the Jiangluo mining area in Huixian County, which is rich in mineral resources.

The company plans to invest about 5 billion yuan to build a green mine with 3 million tons of selected lead-zinc ore this year. The company has successively acquired Xiejiagou Mining, Xiangyangshan Mining and supporting assets, and has begun construction of a lead-zinc ore beneficiation project in the Jiangluo mining area with a production capacity of 3 million tons/year. We believe that the integration of the Jiangluo mining area will increase the reserves of high-quality resources, increase the company's production capacity, and increase production and sales, thereby driving rapid growth in performance.

The rise in lead and zinc prices is expected to accelerate performance growth. In the first half of 2024, zinc and lead prices showed an overall upward trend. The average price of 24Q2 zinc and lead futures was 0.0235 and 0.0181 million yuan/ton, respectively, up 9.2% and 14.5% from the 23-year average price, mainly due to the continued tight supply of lead-zinc ore, compounded by factors such as market expectations of interest rate cuts by the Federal Reserve and the introduction of favorable domestic policies, which also benefited zinc prices. We believe that as the Federal Reserve's interest rate cut cycle progresses, and at the same time, with the support of a steady domestic growth policy, commodity prices are expected to remain strong. The rise in lead and zinc prices is conducive to increasing the profit per unit of the product, thereby boosting the company's performance growth at an accelerated pace.

Profit forecasting and valuation. It is expected that in the next three years, the company will benefit from high lead and zinc prices, while the company actively integrates resources and expands production to drive sales growth, leading to incremental performance. The company's EPS for 24-26 is expected to be 0.48, 0.93, and 1.27 yuan/share, respectively. Referring to the valuation level of comparable companies, considering that the company is in a period of rapid growth in performance, a PE valuation of 27-28 times (PEG is 0.51X-0.52X) was given, corresponding to a reasonable value range of 13.06-13.54 yuan/share, which for the first time covered a “superior to the market” rating.

Risk warning. Risk of fluctuations in lead and zinc prices; macroeconomics falling short of expectations; downstream demand falling short of expectations.