Incidents:

On October 28, 2024, Yuanxing Energy released its report for the third quarter of 2024: in the first three quarters of 2024, the company achieved operating income of 10.37 billion yuan, up 29% year on year; realized net profit of 1.8 billion yuan, up 20% year on year; realized net profit after deducted from mother was 1.79 billion yuan, up 16.5% year on year; gross sales margin was 42.6%, up 5.2 pcts year on year, net sales margin 26.0%, up 2.7 pcts year on year. The net flow was $3 billion.

In Q3 2024, the company achieved operating income of 3.3 billion yuan, +23%, or -13% month-on-month; realized net profit of 0.6 billion yuan, +31% year-on-year, -7% month-on-month; net profit after deduction of 0.58 billion yuan, +29% year-on-year, and -9% month-on-month; and net cash flow from operating activities of 1.63 billion yuan. Gross sales margin was 38.94%, -0.01 pct year-on-year, and -5.3 pcts month-on-month. Net sales margin was 25.7%, +3.3 pcts year over year and -0.6 pcts month over month.

Investment highlights:

The first phase of production in Alashan released benefits, and net profit to mother increased 31% year-on-year in Q3

2024Q3 achieved net profit of 0.6 billion yuan to mother, an increase of 0.14 billion yuan over the previous year and a decrease of 0.04 billion yuan over the previous year. The company's performance increased month-on-month, mainly due to a significant increase in investment income. 2024Q3 confirmed investment income of 0.185 billion yuan, an increase of 0.1 billion yuan over the previous year, and an increase of 0.14 billion yuan month-on-month, thanks to the increase in the profit level of the company's participating subsidiary, Mengda Mining in the third quarter. 2024Q3's gross profit was 1.29 billion yuan, up 0.24 billion yuan year on year and 0.39 billion yuan month on month. On a year-on-year basis, Alashan Phase I gradually put into operation to release benefits to make up for the decline in the price difference of soda ash; on a month-on-month basis, the narrowing of the price spread of soda ash, baking soda, and urea in the third quarter compressed the profit side. The average price of 2024Q3 soda ash was 1,598 yuan/ton, -16% month-on-month, and the average price difference of the natural alkali method was 1,220 yuan/ton, -36% year over year, -19% year over year; baking soda price was 1,374 yuan/ton, -21% year on month, -13% month on month, price difference was 947 yuan/ton, -27% year on month, -18% month on month; urea price price price was 1,889 yuan/ton, -17% month-on-month, -38% month-on-month, -24% month-on-month. In addition, 2024Q3 sales expenses increased by 0.04 billion yuan year on year, management expenses increased by 0.05 billion yuan year on year, and minority shareholders' profit and loss increased by 0.11 billion yuan year on year. Month-on-month, 2024Q3 financial expenses decreased by 0.03 billion yuan month-on-month, income tax decreased by 0.06 billion yuan month-on-month, and minority shareholders' profit and loss decreased by 0.1 billion yuan month-on-month.

Construction of the second phase of the Alashan project has begun, and we are optimistic about the company's long-term growth

The company's Alashan natural alkali project plans to build a soda ash production capacity of 7.8 million tons/year and a baking soda production capacity of 0.8 million tons/year. The first phase plans to build 5 million tons/year of soda ash and 0.4 million tons/year of baking soda; the second phase plans to build 2.8 million tons/year of soda ash and 0.4 million tons/year of baking soda. The first phase of the project was put into operation in June 2023. As of October 25, 2024, all four production lines in the first phase have reached production.

The second phase of the project commenced construction in December 2023, with a planned investment of about 5.5 billion yuan, and is scheduled to be completed in December 2025. The new construction capacity of the Alashan project is large. After the completion of the second phase of the project, the company is expected to become a leader in the domestic soda ash industry. The company's cost per ton of soda ash is expected to be further reduced. We are optimistic about the long-term growth that the Alashan project will bring to the company.

The profit forecast and investment rating are based on the commissioning progress of the company's Alashan project and the price difference of soda ash. The company's revenue for 2024/2025/2026 is estimated to be 13.6, 15.1, and 17 billion yuan, respectively, and net profit to mother is 2.391, 2.806, and 3.25 billion yuan, respectively, corresponding to PE of 11, 9, and 8 times. The first phase of the company's Alashan was fully put into operation, and construction of the second phase has already begun. It is optimistic about the company's future growth and maintains a “buy” rating.

Risks indicate the risk of raw material price fluctuations, the risk of product prices falling sharply, downstream demand falling short of expectations, the construction and commissioning progress of the Alashan project falling short of expectations, and the risk of a decline in macroeconomic demand.