JL MAG RARE-EARTH(300748)：HIGH-PERFORMANCE MAGNETIC MATERIALS SUPPLIER POISED TO BENEFIT FROM PROSPEROUS SUBSECTORS-格隆汇

机构：中金公司
研究员：Zheng WANG/Yingdong WANG/Ding QI/Tao ZENG/Yan CHEN/Jianrun WANG/Wenyi YANG/Jiaming ZHANG

　　Investment positives
　　We initiate our coverage of JL MAG Rare-Earth (JLMAG) with an OUTPERFORM rating and a target price of Rmb39.20, implying 45.0x 2022e P/E.
　　Why OUTPERFORM rating?
　　Leading supplier of high-performance Nd-Fe-B magnetic materials.JLMAG started from wind power and gradually expanded to other industries with high added value, including alternative fuel vehicles (AFV) and inverter air conditioners, covering multiple high-end applications.JLMAG was listed on the H-share market on January 14, becoming the only rare earth permanent magnetic material company listed both on A- shares and H-shares.
　　Technology helps lower costs; strengthening barriers to competitors　in value chain. We think the firm has four core competitive advantages.First, JLMAG has expanded its capacity by leveraging its geographical advantage and resources provided by strategic investors. It plans to raise its annual high-performance magnetic materials blank production capacity to 230mn tonnes in 2022 and 400mn tonnes in 2025. Second, the firm has high R&D spending. It fully leverages its grain boundary penetration technology to lower production costs and secure a leading gross margin in the industry. Third, thanks to JLMAG’s first-mover advantage, it has established solid relationships with leading clients. JLMAG is the magnet steel supplier to Tesla, BYD, and SAIC Motor. Fourth, the firm has an experienced and excellent management team and motivates employees via a restricted share incentive plan.
　　We expect demand for high-performance Nd-Fe-B permanent magnetic materials to beat our and market expectations thanks to China’s peak carbon emission goals and efforts to achieve carbon neutrality; we see large upside in JLMAG earnings. First, we expect　the AFV sector’s demand for rare earth magnetic materials to increase to 84,000 tonnes in 2025 from 11,000 tonnes in 2020 with a CAGR of 50%.Second, as the volume ramp-up of energy-saving electric machinery has accelerated driven by supportive policies, we estimate demand for rare　earth magnetic materials from this sector will grow to 45,000 tonnes in 2025 from 7,000 tonnes in 2020 with a CAGR of 45%. Third, we estimate rare earth magnetic materials demand from fuel cars, wind power, inverter air conditioners, energy-saving elevators, and consumer electronics will likely grow to 53,000 tonnes, 31,000 tonnes, 15,000 tonnes, 14,000 tonnes, and 8,000 tonnes in 2025 from 25,000 tonnes, 25,000 tonnes, 5,000 tonnes, 7,000 tonnes, and 6,000 tonnes in 2020 with CAGRs at 16%, 5%, 24%, 15%, and 8%. In general, we expect high-performance rare earth magnetic materials demand to increase to 250,000 tonnes in 2025 from 85,000 tonnes in 2020 with a CAGR of 24%. As a frontrunner, we expect JLMAG to benefit from the industry’s rapid growth.
　　How do we differ from the market? The market worries the industry has a low barrier to entry. However, we believe the firm has built a robust advantage in the value chain given its solid relationships with leading clients and domestic rare earth ore suppliers.
　　Potential catalysts: AFV industry remains prosperous; rapid output ramp- up.
　　Financials and valuation
　　We estimate the firm’s EPS at Rmb0.55 in 2021, Rmb0.87 in 2022 (37.9x P/E for JLMAG-A and 25.4x P/E for JLMAG-H), and Rmb1.04 in 2023 (31.8x P/E for JLMAG-A and 21.3x P/E for JLMAG-H), with a CAGR of 21%. We initiate our coverage with an OUTPERFORM rating and target prices of Rmb39.20 for JLMAG-A (implying 45x 2022e P/E and offering 21% upside) and HK$32.20 for JLMAG-H (implying 32x 2022e P/E and offering 24% upside).
　　Risks
　　Unexpected increases in raw material prices; new capacity disappoints; weaker-than-expected demand in downstream industries.