Miracle Automation has signed a strategic cooperation framework agreement with UBTECH Robotics, planning to conduct in-depth cooperation in the application of humanoid robots in NEVs, 3C electronics, smart logistics and other industrial scenarios, and may set up a joint venture company to jointly explore the mass production of humanoid robot products and solutions in the industrial field and core devices such as motion joints. In 1Q23, the price of the main battery materials represented by lithium carbonate fell sharply in a short period of time, and the Company's battery recycling profitability has declined. However, the market and downstream demand are gradually improving, raw material prices are gradually stable, and the Company has the process of realizing all metal extraction of lithium batteries, which is a strong competitive advantage and can stabilize the normal operating profits of the Company in the long run. We reiterate the "BUY" rating.

Event: According to Miracle Automation's announcement, the Company recently signed a strategic cooperation framework agreement with UBTECH Robotics.

The two sides will cooperate deeply in the application of humanoid robots in NEVs, 3C electronics, smart logistics and other industrial scenarios, and may set up a joint venture company. They will jointly explore humanoid robot products and solutions for industrial applications, and the production and manufacturing of humanoid robot motion joints and other core components according to demand, putting in resources to achieve mass production. If the cooperation is successfully implemented, Miracle Automation will be able to provide its intelligent equipment business customers with higher quality products and services, and improve the coordination and expansion of intelligent equipment market customers, which will further enhance the Company's brand influence in intelligent equipment as well as its market competitiveness and overall profitability level.

Miracle Automation self-develops lithium iron phosphate (LFP) battery recycling, and has made breakthroughs in the aspect.

According to Miracle Automation's Weixin official account, the LFP battery full element recovery technology is developed by the Company's lithium battery cycle team, which can achieve full element recovery. Among them, the average recovery rate of battery-grade lithium carbonate and iron phosphate can reach 95%, and the product quality has been certified by customers. The project provides full process solutions for LFP battery recycling, and will fill the industry's lithium iron phosphate battery recycling capacity. The Company integrates the concept of green factory, advanced intelligent manufacturing integration solutions and leading battery recycling process, adopts the development mode of "low energy consumption, low emission and high efficiency" to ensure the efficient operation of the environmental protection project, driving the lithium battery recycling process technology to a new stage, and leading the development of the lithium battery recycling industry.

Provision for loss on inventory, performance bottom confirmed in 1Q.

The Company posted 1Q23 revenue of Rmb749mn (-20.66% YoY), attributable net profit (ANP) of Rmb-299mn (-435.31% YoY) and ex-one-off ANP of Rmb-297mn (-481.40% YoY). Lithium battery cycle business achieved operating revenue of Rmb264mn. In 1Q23, the Company's cobalt manganese nickel sales totaled 663mmt, with lithium carbonate sales of 268t, and the average transaction price of cobalt, nickel and lithium products fell by 22.89%, 4.63%, 18.84% QoQ, respectively. The lithium battery cycle business was affected by a sharp decline in market prices such as lithium carbonate in a short period of time, resulting in an operating loss caused by the inversion of product raw material costs. In addition, Miracle Automation conducted impairment tests on various assets and provided for asset impairment losses of Rmb158mn. At present, the Company's inventory has fallen to a historical low, we believe that 1Q is the bottom of its annual performance, and expect QoQ improvement in the battery cycle business in 2Q with the recovery of NEV sales, and stabilization of lithium carbonate prices.

Vigorous development of the lithium battery cycle business, win-win from innovative technology cooperation.

Miracle Automation now possesses the capacity of processing 100kt of lithium batteries per year (50kt of ternary lithium batteries and 50kt of LFP batteries), with an annual output of 12,000mmt of cobalt manganese nickel, 7.5kt of lithium carbonate, and 11kt of battery-grade iron phosphate. The Company deeply binds the head resources to build production capacity, and strives to establish an internet platform in cooperation with JDT, China Solid Waste and Chemicals Management Technology Center of the Ministry of Ecology and Environment, and the Alliance for Technological Innovation in Compulsory Resources Recycling Industry; It has also established cooperative relations with a number of companies including FAW Group, AIWAY Automobile, Stellantis Group, Chengtong Group, Svolt Energy, Phylion Battery, Haitong Unitrust, Guangzhou Harson, Shanxi Goods & Materials Industry Group, Shaanxi Coal Chemical Industry Technology Research Institute to jointly explore the NEV battery recycling market.

The intelligent equipment business makes steady progress, maintaining the leading position.

In 1Q23, the intelligent equipment business achieved operating revenue of Rmb245mn, accounting for 32.78% of the consolidated revenue. In addition, the Company successfully delivered and undertook a number of automotive intelligent equipment projects, of which new energy gas projects accounted for 84%. At present, the Company has intelligent equipment business orders Rmb1.63bn in hand. As it disclosed in the quarterly report, it expected to receive new orders of about Rmb1.5bn in the rest of the year, with the annual target output value of about Rmb1.6bn. Through the establishment of subsidiaries in the US and Europe, and the establishment of domestic JV in deep cooperation with GEICO, an internationally renowned supplier of painting equipment, the Company continues to make efforts in overseas markets and jointly develops the global automotive intelligent equipment market. In the new round of capital expenditure upgrading cycle of the automotive industry, the Company has comprehensive competitive advantages such as technical level, cost control and project management, which can help it maintain a leading position in the NEV equipment market.

Cyclical equipment business is developing rapidly, and business synergies are reflected.

In 1Q23, Miracle Automation's recycling equipment business achieved revenue of Rmb68mn, accounting for 9.04% of the consolidated revenue. The major achievements of scrap steel market mainly include: the holding subsidiary Hubei Lidi Machine Tool launching phosphogypsum comprehensive treatment equipment; successful development of automatic dismantling equipment and intelligent crushing equipment for lithium batteries and start of operation, effectively achieving industrial collaboration; optimizing the advantages of scrap processing equipment, expanding market share. The business basically broke even in 1Q23, and we expect it to contribute positive profit for the full year.

Cost reduction and efficiency improvement to reduce external influence in the heavy machinery business.

The Company's heavy machinery business achieved revenue of Rmb167mn in 1Q23, up 27% YoY and accounting for 22.36% of the consolidated revenue.

In 2022, the stability of the supply chain of wind power equipment was insufficient, and the domestic and foreign leading wind power OEMs adjusted the production schedule. In this context, the Company controlled the production cost by optimizing the process, reducing the loss and the scrap rate, promoted R&D and sales of new products, and explored new markets and new customers, adjusting the customer and product structure. At the same time, according to the market price and production needs, it adjusted the procurement strategy, so as to improve the overall operating efficiency.

Risk factors: Systemic risk of macro environment fluctuation; market competition; raw material price fluctuation; risks in accounts receivable management and recovery and internal management.

Earnings forecast, valuation and rating: We reiterate our 2023E/2024E/2025E net profit forecast of Rmb205mn/447mn/516mn. Considering that the rapid decline in the price of metals such as lithium carbonate in 1Q23 has led to significant loss of earnings in a single quarter, we believe that the net profit in 2023 cannot fully reflect the profitability of enterprises, so we apply the target valuation for year 2024. Given that the comparable companies (Haosen Equipment (688529.SH), Huahong Technology (002645.SZ), GEM (002340.SZ), Huayou Cobalt (603799.SH)) are trading at an average of 11.1x 2024E PE based on Wind consensus estimates, and taking into account the Company's leading position in LFP battery recycling (first-mover advantage to obtain potential market opportunities and higher profitability), we assign 15x 2024E PE to arrive at a target price of Rmb18 and reiterate the "BUY" rating.