On October 23, Anning Co., Ltd. released its three-quarter report: Q3 achieved revenue of 0.514 billion yuan, -3.4%/+28% YoY, net profit of 0.244 billion yuan to mother, and -8.7%/+17% YoY. In the first three quarters, the company achieved revenue of 1.36 billion yuan, -1.3% YoY, net profit of 0.683 billion yuan (not 0.684 billion yuan after deduction), or -4.0% YoY (-2.6% YoY after deduction). The company's Q3 performance increased slightly month-on-month, and net profit to mother was slightly higher than our forward-looking expectations (0.22 billion yuan). This is a month-on-month increase in the trend of titanium concentrate, the main product. Consider the company's high-quality resource endowments and the growth potential of new projects, and maintain an “gain” rating.

The Q3 titanium concentrate boom increased month-on-month, and the slow recovery in iron ore demand put pressure on gross margins in a single quarter. According to Baichuan Yingfu, the average price of titanium concentrate in the first three quarters was 2,102 yuan/ton, +4.2% year over year, +5.5%/+2.0% year over month, and the increase in downstream titanium dioxide production led to a slight increase in titanium concentrate prices. Demand for vanadium-titanium-iron concentrate, the company's other main product, recovered slowly, causing the company's gross margin in Q3 to be under pressure. In the first three quarters, the company's consolidated gross margin was +0.3 pct to 66.9% year over year (of which the Q3 consolidated gross margin was 65.3%, -2.7 pct/-4.0pct compared to the same period), and the cost rate for the Q3 period was 6.9%, -0.5pct/-2.0pct.

The company's high-quality resource endowments support the boom cycle, and the extension of the industrial chain is expected to take advantage of the integrated advantage. According to Baichuan Yingfu, the price of titanium concentrate (Pan46) was 2,125 yuan/ton on October 23, -0.2%/-2.5% compared to the beginning of the year/end of Q3. Demand for titanium concentrate decreased due to the month-on-month decline in downstream titanium dioxide construction, but the current price boom remains high. In the long run, due to factors such as the decline in global exploration capital expenditure and the decline in high-grade ores, the supply pattern of titanium ore is good, the scarce nature of resources is prominent, and the boom cycle may be long. According to the 2016 semi-annual report, the company is actively expanding downstream businesses such as titanium sponge and titanium. By the end of Q3, the company's balance of projects under construction was 0.828 billion yuan, an increase of 0.178 billion yuan over the end of the Q2 period. The company's 0.06 million ton energy-grade titanium (alloy) material project progressed steadily. Based on high-quality resource endowments, the company extends the downstream sector and has the advantage of integrating the industrial chain. New projects are expected to bring new profit growth points in the future.

Profit forecasting and valuation

We expect the company's 24-26 net profit to be 0.9/1.07/1.25 billion yuan, with a year-on-year growth rate of -3.6%/+18.5%/+17.2%, corresponding EPS of 2.25/2.67/3.13 yuan. Referring to the comparable company's 25-year Wind consensus estimate of 11xPE, considering the company's high-quality resource endowments and the growth potential of new projects, we will give the company a 25-year 13xPE with a target price of 34.71 yuan, maintaining the “increase in holdings” rating.

Risk warning: There is a risk that downstream demand will continue to be sluggish, and the commissioning of new projects will not meet expectations.