中科三环(000970.CN)

Zhong Ke San Huan:Results missed on higher raw materials prices

时间:17-08-18 00:00    来源:德意志银行

Hard to pass through raw materials cost; maintain Hold rating

ZKSH released its earnings with bottom line of RMB153m, almost flattish yoy,only achieving 38% of DBe and consensus, respectively. The company mainlyattributes this to raw materials price hikes during 1H. For instance, Praseodymiumand Neodymium metal price increased by 24% from early 2017to Jun 2017.Given stable demand growth in NdFeB magnets, it is hard for the company topass through the entire cost hike to customers. We revise down our earningsaccordingly and cut our target price by 5% . Maintain Hold.

Margin pressure on strong momentum in rare earth prices

We expect strong rare earth prices momentum to continue thanks togovernment's quota control and crackdowns on illegal mines. SRB buying earlierthis year also helped with some individual elements' demand supply situations.On the other hand, although we have decent magnets demand growth as a resultof emerging EV growth, overall utilization rate across high-end magnets are stillbelow 80%, not to mention 50%-60% for low end plants. We thus envision marginpressure will remain.

Valuation and risks

To reflect higher raw material cost, we revise down our 2017and 2018earningsby 11% and 8%, respectively. We derived our target price of RMB14.0(previouslyRMB 14.7) for Zhong Ke San Huan via a DCF methodology with a WACC of 8.8%.We adopt 10.6% as the cost of equity for San Huan, reflecting a risk-free rate of3.9%, a market risk premium of 5.6% and a beta of 1.2. Risks: higher/lower rawmaterials cost.