Incident: The company announced its 2024 semi-annual report. The first half of the year achieved revenue of 3.362 billion yuan, a decrease of 2.00%; net profit to mother was 0.12 billion yuan, a decrease of 64.02%; after deduction, it was 0.034 billion yuan, a year-on-year decrease of 88.18%.

Multiple factors have dragged down product prices and profit performance, and a high percentage of dividends for half a year shows sincerity. According to the investor relations activity records announced by the company, 2024H1, the company's new construction project was gradually implemented. The capacity utilization rate exceeded 90%, the production and sales volume of high-performance magnetic products increased by more than 40% year on year, and the market share increased steadily, achieving operating income of 3.362 billion yuan, which is basically the same as the same period last year. However, due to factors such as a sharp drop in the market price of rare earth raw materials over the same period last year, lagging changes in raw material costs, and delays in the execution of price lock orders signed by individual customers when the price of rare earth raw materials was relatively high, compounded by increased competition in the industry, etc., a net profit of 0.12 billion yuan was achieved. 1) The price of the main rare earth raw materials for 2024H1 is on a downward trend. Taking praseodymium metal (price including tax) as an example, according to data published by Asia Metal Network and the China Rare Earth Industry Association, etc., the average price from January to June 2024 was 0.4719 million yuan/ton, down about 32.80% from the average price of 0.7022 million yuan/ton in the same period in 2023. The difference in transmission between cost and sales price in the short term has a certain impact on gross margin decline. 2) Customer A paid the advance payment designated to purchase rare earth raw materials in 2023 (reflected in the contractual liabilities at the end of 2023), and the company made a special purchase in accordance with the contract agreement. The price lock contract was partially implemented in the second quarter of 2024; customer B changed the delivery plan for part of the order after the company purchased rare earth raw materials according to the original plan, involving the purchase of about 600 tons of rare earth metals. The price lock contract was yet to be executed in the first half of 2024. The impact of these two factors on gross margin in the first half of 2024 was about 3 percentage points. 3) 2024H1, the company's Ningbo factory and Baotou factory (phase II) projects increased production personnel reserves, training and early resource investment before delivery, and fully prepared for mass production work, resulting in relatively high manufacturing costs and management costs per product unit and reduced profits. Among them, the impact of the Ningbo plant on net profit was about 0.03 billion yuan. 4) For the first time, the company plans to distribute semi-annual equity dividends of 0.8 yuan (tax included) to all shareholders for every 10 shares. The estimated dividend amount is 0.107 billion yuan, accounting for about 90% of the company's net profit attributable to shareholders of listed companies in the first half of 2024, fully demonstrating the company's sincerity.

Profit forecast: Considering the sharp decline in rare earth prices, we lowered the company's EPS by 0.26, 0.34, and 0.50 yuan respectively in 24-26, and PE by 40, 31, and 21 times, respectively, to give it an “increase in weight” rating.

Risk warning: Product prices and gross margin continue to decline due to declining industry demand and increased competition.