Incident: On August 20, 2024, Shanjin International released its 2024 semi-annual report. The company's revenue for the first half of 2024 was 6.505 billion yuan, up 42.27% year on year; net profit to mother was 1.075 billion yuan, up 46.35% year on year; net profit after deducting non-net profit was 1.127 billion yuan, up 58.41% year on year. The corresponding company's 2Q24 revenue was 3.732 billion yuan, up 56.77% year on year; net profit to mother was 0.572 billion yuan, up 30.53% year on year; deducted non-net profit was 0.627 billion yuan, up 45.52% year on year.

Comment: 1H24's profit increased significantly year over year. The company's overall gross sales margin for the first half of 2024 was 30.53%, down 0.11pcts from the same period in 2023. In the first half of 2024, the company's financial expenses fell 242.05% year on year, mainly due to increased interest income and reduced interest expenses; sales expenses rose 61.12% year on year, mainly due to the increase in goods storage expenses. The company's net interest rate for the first half of 2024 was 18.40%, up 0.76pcts from the same period in 2023. We believe that the company can achieve “double improvement in quality and efficiency” in the first half of 2024, mainly because the company achieved effective cost control by optimizing production processes and strengthening on-site management, and raised the company's lean production level.

1H24's net cash flow from operating activities increased year over year. The net cash flow from the company's operating activities in the first half of 2024 was 2.042 billion yuan, up 34.15% year on year, mainly due to the increase in composite gold sales revenue and metal trade revenue. The net cash flow from investment activities was -1.454 billion yuan, a year-on-year decrease of 282.00%, mainly because the company's 1H24 financial investment expenditure was greater than the investment recovery amount.

Net cash flow from financing activities was -1.209 billion yuan, up 8.30% year over year. The balance of cash and cash equivalents at the end of the period was $1.218 billion, a year-on-year decrease of 32.19%. Accounts receivable amounted to 0.069 billion yuan, a year-on-year decrease of 13.12%, and the accounts receivable turnover increased from 76.45 in the same period in 2023 to 116.81. Inventory turnover increased from 2.50 times in the same period in 2023 to 3.20 times.

The company is centered on value creation and is one of the leaders among domestic gold manufacturers. The company is a growing international gold mining company. It is one of the leading gold producers in China. Its business covers the fields of gold exploration, mining and sales. The company's products involve 3 types of metals, namely synthetic gold (containing silver), lead powder (containing silver), and zinc powder (containing silver). The main products of the company's Heihe Rock, Jilin Banmiaozi, and Qinghai Dachaidan bases are all synthetic gold. Among them, Heihe Locke is high silver alloy, and Jilin Banmiaozi and Qinghai Dachaidan are all low silver composite gold, and the gold and silver are all priced separately at the time of sale; the main products of Yulong Mining are lead powder (containing silver) and zinc concentrate (containing silver); the products of Huasheng Gold Mine after resuming production are synthetic gold and gold concentrate.

According to the company's 2024 semi-annual report, the company now has 4 gold mines and 1 lead-zinc-silver polymetallic mine. Among them, Heihe Locke is a high-grade gold mine selected domestically. Jilin Banmiaozi is a mine with advanced domestic production and management levels. Qinghai Dachaidan prospecting and storage potential is huge. Yulong Mining is currently one of the largest mineral silver (silver content) monomer mines in China. In addition, the company also owns Osino Resources Corp., an overseas gold exploration and development company, and Shanghai Shenghong Rongxin, a comprehensive trade service provider whose main business is precious and non-ferrous metals trading and financial instruments are used as risk control methods.

The company has excellent asset quality, perfect governance standards, and leading resources, capital, talent, technology and management advantages in the industry. In addition, the company has rich mineral resource reserves, high quality, and broad exploration prospects. The level of digital management of mines and safety and environmental protection management is in a leading position in the country, and has developed into a listed company with an important influence in the domestic precious metals industry. According to the company's 2024 semi-annual report, in 2023, the company's mineral gold production ranked sixth among listed gold companies in the country, and realized net profit ranked fourth among listed gold mining companies in the country.

The 1H24 gold market is growing strongly, and the price of gold has repeatedly reached new highs. According to the company's 2024 semi-annual report, in the first half of 2024, the global gold market experienced a period of strong growth, bringing benefits to global investors over most investment categories. Various factors, such as continued gold purchases by central banks, the strong entry of Asian investors, and the resilience of global retail consumer demand, have provided effective support for the increase in gold prices. In particular, from mid-March to mid-May 2024, the price of gold repeatedly reached new highs. According to data from the World Gold Council, the price of gold rose 12% year on year in the first half of 2024, and the price of gold was above 2,300 US dollars/ounce for most of the 2Q24. Gold prices in the domestic market continue to rise at a high level, and the trend is stronger than international gold prices. According to data from the Shanghai Gold Exchange, as of the end of June 2024, the closing price of Au9999 gold was 549.88 yuan/gram, up about 14.37% from the opening price of 480.80 yuan/gram at the beginning of the year; the weighted average price in the first half of the year was 514.12 yuan/gram, up 18.98% from 432.09 yuan/gram in the same period last year.

1H24 The overall output of the domestic gold industry has increased. Gold prices are running at a high level, and larger profit margins have prompted major gold mining enterprises and gold smelting enterprises to adjust production capacity structures, optimize production layout, and seize favorable opportunities for high gold prices, which has led to an increase in China's gold production. According to data from the China Gold Association, in the first half of 2024, China's raw gold production was 179.634 tons, an increase of 0.58% over the previous year, including 141.496 tons of gold mineral gold and 38.138 tons of non-ferrous by-product gold. In addition, China's imported raw material production was 72.026 tons, an increase of 10.14% over the previous year. If this part of the imported raw material production was added, the country produced a total of 251.660 tons of gold, an increase of 3.14% over the previous year. According to data from the China Gold Association, in the first half of 2024, the country's gold bar and coin consumption was 213.635 tons, an increase of 46.02% over the previous year.

The company's mine exploration prospects are broad, laying the foundation for its production expansion. Resource reserves are one of the important indicators for measuring the development potential of resource companies. Abundant resource reserves can lay a solid foundation for the company's future performance growth. According to the company's 2024 semi-annual report, as of 1H24, the company's five mining subsidiaries had 15 prospecting rights, and the exploration scope of the prospecting rights reached 175.42 square kilometers. Among them, Yulong Mining has 6 silver, lead and zinc prospecting warrants, and the exploration scope of the prospecting rights is 42.84 square kilometers. At the same time, the Yulong mining area is also a key area attracting attention at home and abroad to find large, very large, and even world-class non-ferrous metal deposits. The Daxinganling Nonferrous Metals Metallogenic Belt and the North China Polymetallic Metallogenic Belt, where it is located, contain rich non-ferrous metal resources and have the advantages of large-scale mining areas for various non-ferrous metals and precious metals.

In addition, Jilin Banmiaozi, Qinghai Dachaidan, Heihe Locke, and Jincheng Shengxin have a total of 9 gold prospecting warrants, and the exploration scope of the prospecting rights reached 132.58 square kilometers. These mining areas guarantee the continuous stability of the company's resources and enhance the company's ability to operate sustainably. We believe that the advantages of the company's mining area nurture the company's huge potential to increase its asset volume and mineral production.

The company increased its capital to achieve “double improvement in quality and efficiency”. In the first half of 2024, the company grasped the booming opportunities of the gold market and strived to achieve the goal of “increasing capital and improving quality and efficiency”. In terms of mine production capacity, the company actively strengthens the management of “six rate” (mining recovery rate, depletion rate, metallurgical recovery rate, comprehensive utilization rate of associated mineral resources, equipment operation rate, total labor productivity) index by optimizing production processes and strengthening site management, and actively creates a smooth and efficient production system, three-level mineral balance, and mining-excavation balance. 1H24 achieved 4.16 tons of gold production, achieving 52% of the planned target for the whole year. In terms of cost control, the company insists on putting equal emphasis on open source and streamlining, exploiting potential and increasing efficiency, and has implemented a series of measures such as strengthening underground production plans and on-site construction control, reducing the rate of mining poverty, strengthening beneficiation process management, and improving plant selection processes to promote continuous cost reduction and continuous improvement of efficiency.

An international resource layout was launched, and overseas companies were acquired to expand production capacity. With the accelerated development of the gold industry, global investment and mergers and acquisitions will become mainstream, and “going global” will become a strategic choice for Chinese gold mining companies.

Currently, China is facing problems such as the gradual decline in resources that are easy to mine in old mines and difficulties in building deep wells. Domestic production falls short of expectations, and there is an urgent need to make full use of overseas resources to fill the gap in demand. While exploring ways to release its own production capacity, the company is also actively developing a “two-way” layout of domestic and foreign resource mergers and acquisitions.

According to the company's 2024 semi-annual report and the “Notice Concerning the Acquisition of Osino Resources Corp.'s Share Settlement” issued, 1H24 implemented the Canadian mining company Osino Resources Corp.

The acquisition plan has begun the first step in international resource allocation. Through this acquisition, the company can quickly obtain high-quality overseas resources and increase gold resource reserves. It is expected to provide 5 tons/year of gold production capacity after commissioning. We believe that the company's acquisition is an important exploration of learning from leading global gold companies, forming an efficient resource merger and acquisition management structure, and reshaping a new pattern of mineral rights and resource reserves. Further release of production capacity will further expand the company's core competitive advantage and seek greater market share.

Investment advice: The company is expected to achieve operating income of 10.211/11.605/13.165 billion yuan in 2024-2026, and realized net profit of 2.265/2.562/2.983 billion yuan respectively, corresponding EPS of 0.82/0.92/1.07 yuan, respectively. The PE multiples corresponding to the current stock price are 19.6X, 17.3X, and 14.9X, respectively. We are based on the following aspects: 1) global gold prices are expected to remain high, and the company's gold products may maintain large profit margins; 2) the company's existing mine exploration prospects are broad, and production capacity is expected to be further released; 3) the company is starting an international layout to expand gold production capacity and reserves, which is conducive to future performance growth. We are optimistic about the company's resource reserves and overseas layout. It was covered for the first time and gave it a “buy” rating.

Risk warning: metal price fluctuation risk; safety and environmental risk; resource management risk; overseas investment risk, etc.