2020 performance is in line with our expectations

The company announced its 2020 results: operating income 604 million yuan, year-on-year + 0.2%; return to the mother net profit of 148 million yuan, corresponding to 0.46 yuan per share, + 0.2% year-on-year, in line with our expectations. 4Q20's operating income is 166 million yuan, year-on-year + 5% / month-on-month + 11%, and return-to-home net profit is 38 million yuan, year-on-year + 2% / month-on-month + 11%. The company plans to pay a dividend of 113 million yuan in 2020, corresponding to 0.35 yuan per share, with a dividend payout rate of 76.5%, which is basically the same as the same period last year.

The new guidelines led to a decline in 4Q20 gross profit margins. We speculate that 4Q20 transferred 13.77 million yuan of transportation expenses originally calculated from sales expenses to operating costs, resulting in a reduction in 4Q20 gross profit margin to 28.6%, year-on-year-5.5ppt/-7.0ppt. If calculated according to the original caliber, the gross profit margin of 4Q20 will be adjusted to 36.9%, and the gross profit margin of 2020 will be adjusted to 36.8% compared with 2019 + 2.3ppt.

The overall increase in the cost rate level calculated according to the original caliber. If the sales expenses are calculated according to the original caliber, the company's sales / management / R & D / financial expense rate in 2020 will be 3.1%, 2.3%, 4.3%, 2.8%, and 7.4%, respectively, compared with 2019 + 1.6ppt.

The net outflow of investment activities worsened the cash situation. The net cash flow of the company's operation / investment / financing activities in 2020 was 1.57 billion yuan, of which the net cash flow of investment activities decreased by 307 million yuan compared with 2019, mainly due to the decrease in the number of redemptions of financial products compared with the same period last year and the construction of silver magnetic materials projects.

Trend of development

Cost control actively responds to the impact of rising raw material prices, and the gross profit margin is stable. The price of rare earth metals has continued to rise since May 2020, and the price of neodymium oxide has risen by 140% since May 2020. The company strengthens cost control and actively communicates with upstream and downstream to negotiate prices. The overall gross profit margin in 2020 is 34.5%, which is higher than that of + 0.1ppt in 2019 and remains stable as a whole.

Based on bonding NdFeB main industry, benefit from the development of energy-saving industry Dongfeng. The company is the largest manufacturer of bonded NdFeB magnets in the world, and has a great competitive advantage in the fields of automotive magnets, hard drives and optical discs. After the impact of the epidemic last year, China's automobile production has increased for 11 consecutive months compared with the same period last year. In the future, with the continuous promotion of the concept of energy saving and environmental protection, automobiles, air conditioners and other downstream industries accelerate the development of automation and intelligence, boosting the demand for bonded NdFeB.

The new project is about to start, and the magnet product portfolio will blossom at multiple points. The company expects that the first phase of Silver Magnetic material "High performance rare Earth permanent Magnet material Project" will be put into production in April this year. When the project reaches full production, it is expected to expand the annual production capacity of hot pressing / samarium cobalt of 1000 million 500 tons. In addition, the company plans to increase the mass production capacity of injection magnets this year to create new growth points for profits.

Profit forecast and valuation

Consider that the first phase of the hot pressing and samarium cobalt project will be put into production, raise the 2021 profit forecast by 7% to 185 million yuan, and introduce the 2022 profit forecast of 216 million yuan. The current share price corresponds to 2021e/2022e PE 28.3x/24.2x. The neutral rating was maintained, but due to the downward shift in the valuation center of the industry, the target price was lowered by 13.3% to 20.02 yuan, corresponding to 2022e PE 30.0x, which has 23.7% upside compared to the current stock price.

Risk

The progress of the project is not as expected, and the price of rare earth raw materials continues to rise.