Incident: Baogang Co., Ltd. released its 2024 semi-annual report. The company achieved operating income of 35.209 billion yuan in the first half of the year, a year-on-year decrease of 1.05%; net profit attributable to shareholders of listed companies was 0.108 billion yuan, a year-on-year decrease of 73.83%.

Comment:

The Baiyun Ebo mine is rich in resource reserves. Baiyun Ebo Mine, owned by Baogang Group, the controlling shareholder, is a world-famous resource repository with proven iron ore reserves of 1.4 billion tons; rare earth refractive oxide reserves of 39 million tons, ranking first in the world; fluorite reserves of 0.13 billion tons, ranking second in the world; and niobium reserves of 6.6 million tons, ranking second in the world. Baiyun Ebo ore mined by Baogang Group is an exclusive supplier company.

The company has iron ore reserves of 0.67 billion tons of Baiyun Ebosi Ore, with an average rare earth grade of 1.07%. The Baiyun Ebo mine tailings depot owned by the company has resource reserves of 0.2 billion tons and rare earth refractive oxide reserves of about 13.82 million tons, ranking second in the world; fluorite reserves are 43.92 million tons.

Total rare earth mining control indicators continue to increase. The total control index for the second batch of rare earth mining in 2024 was 135,000 tons of REO, which remained flat from month to month. The total rare earth mining control index for the first two batches of 2024 was 2,70,000 tons of REO, an increase of 12.5% year-on-year over the previous two batches of total rare earth mining control indicators. Currently, the company and affiliated company Northern Rare Earth calculate and adjust rare earth concentrate prices according to the pricing formula at the beginning of the first month of every quarter, and re-sign rare earth concentrate supply contracts or supplementary agreements and make announcements. The rare earth concentrate related transaction price in the first quarter of 2024 was 20,737 yuan/ton, the rare earth concentrate related transaction price in the second quarter was 16,792 yuan/ton, and the rare earth concentrate related transaction price in the third quarter was 16,741 yuan/ton (REO = 50%). In 2024, the company expects to supply 0.39 million tons of rare earth concentrate to northern rare earths, and the total amount of rare earth concentrate-related transactions is expected to be no more than 12 billion yuan.

Demand for real estate and infrastructure is weak, and competition in the steel industry is intensifying. The characteristics of the steel industry entering the “stock optimization” stage are becoming more and more obvious. Steel production falls slightly, the intensity of domestic demand weakens, the apparent decline in crude steel consumption is greater than the decline in production, the conflict between supply and demand is prominent, steel prices continue to be low, compounded by factors such as the fact that raw material prices are easy to rise and fall. Industry profits declined year on year. The industry operation showed a “three high and three low” situation with high output, high cost, high export, low demand, low price, and low efficiency.

Profit forecast and investment rating: The company's revenue for 2024-2026 is expected to be 71.3/72.96/74.78 billion yuan, respectively, and net profit to mother is 0.349/1.188/2.062 billion yuan, respectively. Competition intensified due to poor demand in the steel industry, and the company's steel business profits declined, but considering that the company has the highest rare earth oxide reserves in the world and the increase in total rare earth mining control indicators year by year, the company was given a “buy” rating.

Risk warning: the decline in rare earth prices, the risk that the profitability of the company's rare earth business falls short of expectations; the risk that the steel industry is sluggish and the company's steel business continues to lose large losses; the risk that performance forecasts and valuation judgments fall short of expectations.