Investment positives

We initiate coverage on Rising Nonferrous Metals Share Co., Ltd. (RNMS) with an OUTPERFORM rating and a target price of Rmb45.26, implying 56x 2022e and 32x 2023e P/E.

Why an OUTPERFORM rating?

RNMS is Guangdong Rare Earth Industry Group’s sole listing arm; robust expansion of rare earth reserves paves way for earnings growth. RNMS focuses on rare earth mining, smelting, separation and processing, as well as trade in nonferrous metals.The firm has obtained a permit for its Xinfeng project, adding to its rare earth reserves by 111,362t, which is 8x the combined pre-existing reserves of RNMS’s rare earth mines. The firm’s total rare earths reserves are 124,334t, paving the way for earnings growth, in our view.

Heavy rare earth ores are strategically important; supply tight due to strong demand growth. China controls more than 80% of the world’s known reserves of heavy rare earth ores, such is their strategic importance. In an era of electrification, the demand for high-quality neodymium iron boron (NdFeB) magnets used in electric motors is growing rapidly, which drives demand for rare earth oxides. Over 2022-2025, we expect the annual worldwide shortage of heavy rare earth ores may be 5,966t, 2,366t, 2,134t and 4,032t. Our forecast suggests supply conditions will likely remain tight.

Expanded reserves and efforts to turn around earnings to lead to growth. The firm’s known rare earth reserves have grown almost 5x with the Xinfeng mine permit. We believe this lays a foundation for more upstream capacity and expansion into downstream advanced processing. In the tungsten business, RNMS has spun off loss-making mines, and retains the Hongling and Shirenzhang mines, with a combined reserve of 67,282t. The Hongling tungsten mine is being developed with partners, and the firm is upgrading the Shirenzhang mine. Also, RNMS acquired a 40% stake in Dabaoshan Mining in 2020, and the acquisition is a stable contributor to earnings.

RNMS management is approaching an inflection point. A new management team has deepened reform at the firm, and plans to launch an equity incentive plan for senior executives, mid-level leaders and key staff. We believe these efforts will likely support revenue growth.

How do we differ from the market? The market believes that dysprosium diffusion technology may continue to reduce demand for heavy rare earths. However, we don’t think the technology has considerably reduced terbium consumption. Heavy rare earth ores contain more praseodymium neodymium than other rare earth ores. There are tight supply conditions for heavy rare earth ores, and the market has underestimated their strategic value, in our view. Also, we believe the expansion of reserves and new management will likely contribute to improved earnings.

Potential catalysts: Turnaround in prices of rare earths; implementation of further reform measures from the new management team; earnings growth driven by development of Xinfeng and Huaqi mines, relocation and upgrading project at subsidiary Fuyuan, as well as construction of and operations at rare earth metal and magnetic material projects.

Financials and valuation

Our 2022-2024 EPS forecasts are Rmb0.80, Rmb1.41 and Rmb2.01, implying a CAGR of 58%. We believe revenue growth may accelerate from 2022. We expect the firm’s reserves, output and advanced processing businesses to grow noticeably. We believe the firm has strong potential for a rerating. Initiate with OUTPERFORM. We assign a TP of Rmb45.26, implying 56x 2022e and 32x 2023e P/E, offering 13.4% upside. The stock is trading at 50x 2022e and 28x 2023e P/E.

Risks

Negative surprises in rare earth supply; disappointing demand for new energy vehicles; slower-than-expected progress in rare earths and magnetic material project.