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JL Mag Earnings: Revenue and Profit Missed Due to Weaker Pricing; H-Shares Undervalued

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JL Mag Rare-Earth Co Ltd Class A

Narrow-moat JL Mag 300748 reported disappointing third-quarter results. Revenue and net profit in the first nine months accounted for only 60% and 70% of our full-year forecast, respectively. Amid declining prices of various rare earth materials during the period, we see increasing price pressure for the company’s rare earth magnet products. As a result, revenue from new energy vehicle, or NEV, customers recorded its first year-over-year decline since 2021. With a rise in selling, general and administrative, and research expenses, third-quarter net profit dropped 27% year over year to CNY 162 million.

We trim our 2023-25 revenue estimates by 12%-18% and net profit by 9%-14% to factor in declining product prices. We reduce our fair value estimate to HKD 13.00 (CNY 11.60) from HKD 14.60 (CNY 13.00), which implies a 2024 P/E ratio of 23 times. At the current price, while A-shares are at a premium, H-shares remain attractive in 4-star territory.

JL Mag’s third-quarter revenue declined 15.1% year over year to CNY 1.6 billion. Sales from NEV customers reversed their sequential growth trend since 2021 with an 8% drop in revenue over the same period last year—likely due to pricing pressure from auto customers looking to contain costs. The second-largest revenue segment, energy-saving variable-frequency air conditioners, also posted a 33% revenue decline. Meanwhile, the wind turbine generator segment posted 35% revenue growth on a low base.

Despite near-term margin pressure, our longer-term investment thesis for the company remains intact. We remain positive about JL Mag’s longer-term growth potential. As JL Mag has the most fast-growing NEV customers, we expect revenue contribution from the NEV segment to increase to above 50% in 2023-25 from 40% last year. Growing economies of scale and a better product mix would help to recover gross margin to average 18.0% during 2023-25, compared with 16.2% in 2022.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Vincent Sun, CFA

Senior Equity Analyst
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Vincent Sun, CFA, is a senior equity analyst for Morningstar Asia Limited, a wholly owned subsidiary of Morningstar, Inc. He covers the China auto/electric vehicle industry and related suppliers.

Before joining Morningstar in 2022, Sun was an executive director at a leading Chinese Internet company, conducting activities related to strategic investment and the capital markets. Prior to that, he spent more than eight years working as an equity analyst in Hong Kong and covered China's auto industry as a vice president at Deutsche Bank.

Sun holds a Master of Science from the University of British Columbia's Sauder School of Business and a bachelor's degree in business administration from Shanghai Jiao Tong University. He also holds the Chartered Financial Analyst® designation.

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