兴业证券-云海金属-002182-The Great QoQ Improvement in Performance, Deep Processing Begins to Take Shape-2007

　　云海金属(002182)
　　Company Profile
　　NANJING YUNHAI SPECIAL METALS CO., LTD is a China-based company principally engaged in thesmelting, pressing and processing of nonferrous metal. The Company’s main products includealuminum alloys, magnesium alloys, master alloys, die castings, extrusion products and strontium,among others. The Company’s products are applied in automobile and electronic industries. TheCompany distributes its products in domestic market and to overseas markets.(Source: Reuters)
　　Event
　　NANJING YUNHAI SPECIAL METALS (the company) announced its H120 financial results. In H120, thecompany realized CNY 2.521 billion in revenue, up 2.34% year on year (YoY) but down 18.88% quarterover quarter (QoQ); its net profit attributable to shareholders came in at CNY 96.99 million, a declineof 65.08% YoY and 84.67% QoQ; its net profit after deducting non-recurring items stood at CNY 88.82million, a 16.17% YoY decline and a 48.7% QoQ decrease.
　　For Q220 alone, the company hit CNY 1.414 billion in revenue, up 11% from a year earlier and 28%from a quarter earlier; it made CNY58,96 million in net profit attributable to shareholders, a decreaseof 74.4% from a year earlier but an increase of 55% from a quarter earlier; its net profit afterdeducting non-recurring items stood at CNY 55.22 million, down 15% YoY but up 64% QoQ.
　　Comments
　　The company also published its preliminary financial report for the first nine months. Due to theincrease in sales volume, the company is estimated to make CNY 170 million -200 million in net profitfor the first nine months, down 67%-61% from a year earlier; its net profit after deductingnon-recurring items came in at CNY 170 million – CNY 200 million, an increase of 0.4%YoY- 18% YoY.
　　For Q320, the company is estimated to achieve CNY 73.01 million – CNY 103.01 million in net profit,down 70% YoY – 57% YoY; its net profit after deducting non-recurring items is estimated to registerCNY 73.01 million- CNY 103.01 million, a year-on-year growth of 15% - 63%.
　　in products prices, the company’s gross margin decreased from a year earlier. 1) Through expanding clients and developing lightweight applications, the sales volume ofmagnesium and aluminums alloys increased from a year earlier in Q220 and the company’srevenue also climbed 11% year on year.
　　2) As the decline pace of products prices was wilder than that of raw materials, the average priceof magnesium ingots, magnesium alloys and silicon irons in Q220 declined by 20%, 18% and1.19%, respectively, making the company’s gross margin decline 4.79 percentage points from ayear earlier.
　　3) The production capacity utilization rate in Q220 was increased from a quarter earlier, driving upthe gross margin by 0.22 percentage points from the previous quarter.
　　In addition, the decreased gross margin was attributed to relocation allowance at the same periodlast year and the declined magnesium prices, and the net profit rate in Q220 fell 14 percentagepoints. As the gross margin increased on the quarterly basis and the income tax reduced, the net profitrate in Q220 edged up 0.69 percentage points from the previous quarter.
　　On one hand, as the price of silicon irons was revised down, the price ratio of magnesium toaluminum awaits a recovery. One the other hand, as the deep processing begins to take shape, therevenue and gross margin of die castings saw a surge. After the join of China Baowu Steel Group, thecompany grew rapidly in lightweight business, became the global supplier of VOLVO, and joined thesupplier system of parts and components for Porsche and BMW. In the meantime, as it also providesproducts to new energy vehicle manufacturers including BYD, Beijing Automotive Group, Geely andTesla, its profitability is expected to further improve.
　　Earnings forecast and investment recommendation
　　We remain our earnings forecast for the company. Its net profit attributable to shareholders isestimated to be CNY 208 million/ CNY 344 million / CNY 403 million for 2020/2021/2022, and its EPSis estimated to be CNY 0.32/ CNY 0.53/ CNY 0.62, implying a P/E ratio to be 34.9x/ 21.1x/ 18x,respectively, based on the closing price on July 28th 2020. Reiterate “Outperform”.
　　Potential risks
　　a great decline in products prices; slower-than-expected progress of projects; less-than-expecteddemand in the downstream