On July 1, Zhongke Magnetics opened with a daily limit. On the news side, the "Regulations on the Administration of Rare Earths" was announced, which will come into force on October 1, 2024. The "Regulations" stipulate that the total amount of rare earth mining and rare earth smelting and separation shall be regulated, and the dynamic management shall be optimized.
Since its listing in April 2023, Zhongke Magnetics has staged a good show of "changing its face when it is listed", which has broken the hearts of many investors.
It is curious how long can such a market last today?
The performance listing is a "change of face"
The rich and low-key Dongyang, the famous Hengdian. Dongyang, Zhejiang Province is not only located in the "Oriental Hollywood", but also an important production base of magnetic materials in the mainland, enjoying the reputation of "China's magnetic capital".
Up to now, a total of 11 A-share listed companies have been born here, of which 2 belong to the magnetic materials industry, namely Hengdian East Magnetic and Zhongke Magnetics. The former is the listed company with the highest market value in Dongyang, and the latter is the first company listed on the GEM after the implementation of the registration system.
According to public information, Zhongke Magnetics was established in March 2010 and is mainly engaged in the research and development, production and sales of permanent magnet materials, including sintered NdFeB permanent magnet materials and permanent ferrite magnets.
Sintered NdFeB permanent magnet materials and permanent magnet ferrite magnet products are typical high-efficiency, energy-saving and low-carbon industrial products, which have outstanding advantages in reducing carbon emissions, and can be widely used in low-carbon economy and clean energy fields such as energy-saving home appliances, high-efficiency and energy-saving motors, new energy vehicles, and wind power generation.
The main customers of Zhongke Magnetics are the industry's leading electroacoustic device manufacturers and permanent magnet motor manufacturers, such as South Korea's star master, Kone Electronics, EM-Tech, Dongke Holdings, Goertek, Welling Motor, Wolong electric drive, etc., and the products of related customers are mainly used in Samsung, Harman, Sony, Huawei, Xiaomi, Amazon, Midea, Gree, Daikin and other world-renowned consumer electronics and energy-saving home appliance brands.
However, the company's first annual report after listing was very disappointing.
In 2023, Zhongke Magnetics will achieve operating income of 484.5976 million yuan, a year-on-year decrease of 21.75%; the net profit attributable to the parent company was 48.132 million yuan, a year-on-year decrease of 46.15%; The net profit attributable to the parent company after deducting non-profits was 38.3785 million yuan, a year-on-year decrease of 53%.
In the first quarter of 2024, the operating situation of Zhongke Magnetics has not improved significantly, achieving an operating income of 114.0212 million yuan, a year-on-year increase of 0.34%; The net profit attributable to the parent company was 4.0445 million yuan, a year-on-year decrease of 69.13%.
In terms of profitability, from 2021 to 2023, the gross profit margin of Zhongke Magnetics will be 26.69%, 22.20%, and 15.74%, respectively, and the net profit margin will be 15.61%, 14.43%, and 9.93%, respectively, all of which will decline year by year. In the first quarter of 2024, its gross profit margin and net profit margin will decline to 6% and 3.55% respectively.
In 2023, the sales volume and average price of NdFeB products, the main product of Zhongke Magnetics, will decline significantly, but Zhongke Magnetics plans to significantly expand the production capacity of this product.
Zhongke Magnetics said in its annual report that in the next few years, the company will make full use of the country's policy support for the permanent magnet material industry, rely on the existing R&D, customer, brand, management and market advantages, closely focus on the company's development strategy, continue to grow bigger and stronger, and complete the construction project with an annual output of 20,000 tons of energy-saving motor magnetic tiles and an annual output of 2,000 tons of high-performance NdFeB magnets. At the same time, the company will continue to increase investment in technology research and development, maintain the market dominant position of products, and improve the company's market share.
Technical strength is questioned
There are high technical barriers to the preparation and large-scale production of high-performance rare earth permanent magnet materials, and the main production process requires the support of mature technical technology and advanced professional production equipment.
In the eyes of industry insiders, the sharp decline in the performance of Zhongke Magnetics is rooted in the company's lack of attention to research and development, resulting in insufficient competitiveness of products in the severe market environment.
In a recent investor research activity, Zhongke Magnetics claimed that both types of products have their own unique market competitive advantages, which can fully meet the diversified customization needs of different downstream fields and different customers.
In terms of ferrite business, the company's cobalt-free and low-cobalt formulas and other raw material formulations have strong competitiveness and outstanding cost reduction capabilities; In the NdFeB business, the company's high-abundance rare earth balance application technology can reduce costs and have a relative competitive advantage in the subdivision of small, light and thin precision magnets for consumer electronics.
However, judging from the specific R&D strength, the performance of Zhongke Magnetics does not seem to be as good as it says.
For a long time, the company's total R&D investment accounted for less than 4% of operating income, compared with its comparable listed companies in the same industry listed in the prospectus, both the R&D expense rate and the scale of R&D expenses are at the bottom. In addition, the income of R&D personnel disclosed by the company is also significantly lower than that of comparable companies in the same industry.
At the end of 2023, the total number of employees in Zhongke Magnetics will be 617, and there will be 78 R&D personnel. From the perspective of overall educational level performance, nearly 80% of employees are at high school level and below; Only 0.16% of the students are at the master's level.
There are external troubles and internal worries
As a part of the ferrous metal industry chain, the rare earth permanent magnet material industry has been developed in mainland China for decades, penetrating into many fields such as computers, instrumentation, household appliances, wind power generation, and new energy vehicles.
However, nowadays, the involution of this industry is serious, there is structural overcapacity, the degree of product homogeneity is high, and the industry competition is fierce. The price fluctuations of the main raw material market will have a significant impact on the company's product unit price, gross profit margin and operating performance.
What makes the market wonder is whether Zhongke Magnetics has signed a long-term supply agreement with rare earth suppliers, whether the supply of rare earth is stable, and whether the transmission mechanism to downstream customers is smooth in the case of a sharp rise in raw material prices?
If the market price of major raw materials fluctuates sharply, and Zhongke Magnetics fails to lock in the cost of raw material procurement through reasonable procurement mechanism, inventory management and other means, or fails to pass on the pressure of increasing raw material costs to customers through the price transmission mechanism in a timely manner, it will be unimaginable for its business performance.
It is worth noting that Zhongke Magnetics is a typical family business. Up to now, the actual controllers of the company are Wu Zhongping, Wu Shuangping, and Wu Weiping, and the three of them are brothers, sisters and brothers, and jointly control the company's board of directors and senior management positions.
As of the first quarter of 2024, Wu Zhongping, chairman and general manager, holds 33.30% of the shares and is the company's largest shareholder; Director Wu Shuangping holds 16.03% of the shares; Wu Weiping, director and deputy general manager, holds 14.79% of the shares, and the total shareholding ratio of the three reaches 64.12%, with an absolute controlling position.