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

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.