How much did third-quarter earnings improve?

  • Net profit for the first three quarters of 2026 was 408 million yuan, up 112% year on year and close to the midpoint of the company’s previous earnings guidance range of 363 million to 463 million yuan. It represented 72% of the market’s full-year consensus estimate and 75% of Citi’s full-year forecast, respectively.
  • Based on cumulative figures, third-quarter net profit was 171 million yuan, up 462% year on year and 74% quarter on quarter. Gross profit for the same period was 272 million yuan, up 240% year on year and 50% quarter on quarter.

What operating changes lay behind the profit growth?

  • The third-quarter gross margin reached 26.9%, rising 14 percentage points year on year and 5 percentage points quarter on quarter. The company attributed the improvement to higher prices for some products, coordination between procurement and sales, and optimization of its product mix and trading activities.
  • Excluding non-recurring gains and losses, net profit for the first three quarters was 411 million yuan, up 123% year on year. However, inventory impairment shifted from a net reversal of 24.6 million yuan in the first half to a net charge of approximately 6 million yuan in the third quarter; the net charge in the same quarter last year was approximately 8.7 million yuan.

Why was the improvement in earnings not matched by an improvement in cash flow?

  • Operating cash flow for the first three quarters was 674 million yuan, capital expenditure was 58 million yuan, up 44% year on year, and free cash flow was 616 million yuan. However, calculated third-quarter free cash flow turned to a net outflow of 43 million yuan, with cash performance weaker than profit performance.
  • This cash-flow change occurred alongside the improvement in gross margin; the data provided in the report are insufficient to attribute the quarterly outflow to any specific operating item.

Why does Citi maintain its Buy rating?

  • Citi maintains its Buy rating and target price of 65.8 yuan, valuing the company at 12 times forecast 2027 price-to-book. The multiple is 1.5 standard deviations above the company’s historical average since 2013, reflecting Citi’s view that the industry is in the early-to-middle stages of an upcycle.
  • Citi believes policy support, supply discipline and the strategic value of rare earths in electrification and supply-chain security help support the valuation; at the same time, the bank does not expect the current cycle to reach the intensity of the 2021 peak. Downstream demand, overseas capacity expansion, rare-earth prices and changes in policy quotas could all affect earnings and valuation.