Shuikoushan injected, giving the company precious metals resource attributes. In 23Q1, Shuikoushan Mining injected a listed company. The company transformed from a pure smelting enterprise to an integrated mining and metallurgy enterprise, adding precious metal resources such as high-quality gold and silver. According to the company announcement, the Kangjiawan mine in Shuikoushan had a gold metal volume of 39.8 tons, an average grade of 3.10 g/t, silver metal volume 1,321.40 tons, and an average grade of 103.17 g/t. The resource grade was at the forefront of the industry. In 2020-2021, the mining scale of Shuikoushan is 1-1.5 tons. Currently, the mining scale of Shuikoushan is 650,000 tons/year. According to the “Shuikoushan Lead-Zinc Mine Development and Utilization Plan”, the mine design and selection scale is 800,000 tons/year. It is expected to be completed by the end of 2023. The company's mineral gold production will increase from the current 1.5 tons to 1.85 tons, and production is expected to increase by about 25%.

The zinc smelting market share is leading in the country, and the cost advantage is remarkable. The company has formed a production capacity of 300,000 tons of zinc smelting and 380,000 tons of deep processing of zinc-based alloys. The total production capacity of zinc products is 680,000 tons, ranking first in the country. In 2022, the domestic zinc production was 6.8 million tons, and the company produced 650,000 tons of zinc in 2022, with a market share of about 10%, ranking among the highest in the industry. In addition, in the zinc field, the company deepened product restructuring, and the market share of zinc-aluminum-magnesium alloys increased from 5% to 25% in 2022. The cost of the company's zinc products is ahead of its peers, about 10% lower than the industry average cost. The gross margin of the company's zinc and zinc alloy business in 2022 was 3%, maintaining the leading level in the industry.

Backed by Minmetals Group, a central mining enterprise, it operates steadily, and its growth potential needs to be further unleashed. The company's equity structure is stable. The controlling shareholder of the company is Hunan Nonferrous Metals Group Co., Ltd. (“Hunan Nonferrous Metals”), and Minmetals Group is a wholly-owned shareholder of Hunan Nonferrous Metals Group. The company relies on Minmetals Group, a central mining enterprise, and has steadily integrated the group's related assets. Among them, the injection of Shuikoushan has greatly increased the company's performance level. The net profit of the company in Q1-Q3 in 2023 was 531 million yuan, +25.43% year-on-year. At the same time, the resource-side profit contribution increased significantly; in 2023, the company plans to purchase 100% of its shares in Minmetals Copper from Shuikoushan Group in cash to enter the electrolytic copper sector, further increasing the profitability of listed companies. As an important listing platform for the Group, the company's future growth potential is expected to be further unleashed.

Precious Metals: The trend continues, the pace is gradual. We believe that, on the one hand, the decline in the US economy is unavoidable in the medium term. The current remote nominal interest rate of around 4.0% has a lot of room for decline from 1.5% of the bottom of the economy. As the unemployment rate bottoms out and rebounds, the inflection point in precious metals prices has officially been established; on the other hand, US dollar credit concerns and the subsequent rise in central bank purchases may push the price of gold to a new height. Meanwhile, in the second phase of the upward trend in precious metals, silver also had good elasticity.

Profit forecast and investment rating: The company relies on Minmetals Group, a central mining enterprise, and operates steadily. Shuikoushan injects the company's resource attributes, and future development potential is expected to be further unleashed. Let's assume that the 2023-2025 annuity price is 440/470/490 yuan/gram, and the zinc price is assumed to be 2.20/2.25/23,000 yuan/ton; mineral gold production is 1.50/1.80/1.85 tons, respectively, and the production and sales volume of zinc and zinc alloys is 680,000 tons. The company is expected to achieve net profit of 6.95/8.75/1,099 billion yuan in 2023-2025, respectively. The current stock price is 7.82 yuan, and the corresponding PE is 12/10/8x, respectively.

The precious metals resources business has significantly increased the company's profits. We believe that the market has underestimated the valuation level of the company's overall business, and that there is potential for restoration. It covered for the first time, and gave it a “buy” rating.

Risk warning: macroeconomic fluctuations exceeding expectations, risk of company product orders and production capacity falling short of expectations, risk of falling processing costs due to intense industry competition, risks such as rising costs, falling prices, etc., risks such as rising costs, falling prices, etc., risk of production safety inspections exceeding expectations, risk of untimely updates of research and usage information, risk of model estimation errors, etc.