JL Mag Reported a Mixed Q4 With Weaker Margin

Narrow-moat JL Mag 300748 reported mixed fourth-quarter results. Revenue expanded 68% year over year, in line with the preliminary range. However, despite top-line growth, net profit for the quarter declined 84% year over year to CNY 16 million. While the quarterly profit nears the low end of company’s guidance, gross margin for the quarter was weaker than expected. We cut our 2023-24 net profit estimates by 2% and 6%, respectively, and lower our fair value estimate to HKD 28.00 (CNY 25.00) from HKD 29.00 (CNY 26.50). Our fair value implies a 2023 P/E ratio of 24 times, which is justified by 24% 2022-25 net profit CAGR. At the current price, H-shares are trading in 4-star territory. The A-shares, at a 28% premium to its H-shares, are fairly valued.

JL Mag’s fourth-quarter revenue grew a decent 68% year over year to CNY 2.0 billion, around the midpoint of the company’s preliminary announcement. Strong momentum in high-performance rare-earth permanent magnets used in new energy vehicles lifted top-line growth. For the fourth quarter, NEV segment revenue grew about 1.5 times over the same period last year, contributing 50% to total revenue, compared with 37% in the first nine months. The second-largest revenue segment, energy-saving variable-frequency air conditioners, also posted decent growth of 28% for the period, offsetting a 62% decline in the wind power segment. In addition, revenue from robotics and intelligent manufacturing recorded 2.4 times year-over-year growth.

Fourth-quarter gross margin of 9.8% contracted 11.6 percentage points compared with a year ago. The margin miss is likely due to: 1) higher inventory costs due to purchase in the third quarter at higher rare earth prices; 2) pricing pressure from auto customers looking to contain costs; and 3) lower utilization of the Baotou plant in production ramp-up phase. As a result, fourth-quarter net profit declined 84% year over year to merely CNY 16 million.