Continuing to cultivate the industry, Baosteel enters the market to embark on a new journey

The company was founded in 1993, has a strong technical accumulation and has formed a complete industrial chain system of “dolomite mining - raw magnesium smelting - magnesium alloy melting - magnesium alloy processing - magnesium alloy recycling”. By the end of '23, the company had an annual production capacity of 0.1 million tons of raw magnesium, an annual production capacity of 0.2 million tons of magnesium alloys, and a market share of more than 40% for magnesium alloys. More importantly, Baosteel Metal has become the controlling shareholder of the company. Relying on its central enterprise background and technical resource advantages, the company will further consolidate and expand the all-magnesium industry chain layout and embark on a new journey of magnesium industry development.

Magnesium industry: The supply pattern was reshaped, and “small” metals evolved into “big” metals. Under resource and cost advantages, China supplied more than 80% of the world's primary magnesium (excluding the US). However, due to the “blue carbon-magnesium” industry chain being greatly affected by environmental protection and low industrial concentration, the supply of raw magnesium was affected in the short term.

Therefore, increasing the concentration of the raw magnesium industry has become an industry consensus. In particular, with the implementation of large-scale raw magnesium production capacity in Baowu Magnesium, the supply pattern will be greatly optimized, which is expected to stabilize the price and supply of magnesium and restore industry confidence.

Diversified demand opens up space in the magnesium market. 1) The weight reduction of automobiles has led to a significant increase in the amount of magnesium used in bicycles. In particular, with the continuous penetration of large-scale magnesium alloy integrated die castings, we estimate that the domestic automobile magnesium alloy demand CAGR is 54% in 2023-2026, and the long-term demand volume is expected to reach 1 million tons; 2) Magnesium building formwork is gradually being released, and the long-term magnesium template volume of 10 million square meters will drive magnesium demand to 0.16 million tons.

Further, the current volume of magnesium alloy is only at the level of 0.3 million tons, but downstream demand is expected to achieve a long-term boom, driven by automobiles and magnesium building templates, etc., and the high growth rate of demand cannot be ignored. At the same time, with the implementation of Baowu Magnesium's production capacity, the reshaping of industry supply will continue. Therefore, both the supply and demand sides of the magnesium industry should be re-examined, and attention should be paid to the historical opportunities brought by the gradual evolution of magnesium from a “small” metal to a “big” metal.

The entire industry chain expansion+deep processing field expansion. The company has entered a period of rapid growth. The company continues to improve the integrated layout and focus on expanding the deep processing field: 1) Resource side: The company has a total of 1.4 billion tons of dolomite mining rights in Chaohu Lake and Qingyang, and 0.58 billion ton dolomite mining rights in five Yunhai are being processed. After the integration is completed, the company's dolomite resources are nearly 2 billion tons, fully guaranteeing the supply of raw materials. 2) Production capacity continues to expand: The company has three major raw magnesium and four magnesium alloy supply bases. As of the end of 23, the production capacity of raw magnesium and magnesium alloy was 0.1/0.2 million tons/year respectively. After the new construction project is put into operation, the production capacity of raw magnesium and magnesium alloy is expected to reach more than 0.5 million tons, and their raw magnesium market share is expected to reach 37% at that time; 3) Magnesium deep processing field: It has successively acquired companies such as Chongqing Boao and Tianjin Liuhe Magnesium to accelerate the deep processing layout and promote a number of deep processing projects.

Profit forecast and investment suggestions: As the leader in the complete magnesium industry chain layout, the company has obvious advantages in resources and scale. Additional production capacity will gradually be implemented in the future, and revenue and profit are expected to increase dramatically. We expect net profit for 2024-2026 to be 0.305/0.69/1.25 billion yuan, respectively. Referring to the industry average PE, the company will be given 20x PE in 2025, corresponding to a target share price of 14.00 yuan/share, which will be covered for the first time to give a “buy” rating.

Risk warning: risk of market demand falling short of expectations, risk of large fluctuations in raw material prices, risk of project construction falling short of expectations, risk of dolomite demand falling short of expectations, risk of exchange rate risk, risk of calculation deviation