Attributable NP down 27.39% yoy in 1H24, maintain OVERWEIGHT
Yunnan Germanium's revenue/attributable net profit (NP) were RMB348/-9.24mn (+23.53/-27.39% yoy) for 1H24, and RMB217/22.51mn (+59.75/+1.07% yoy, +66.47/+119.58% qoq) for 2Q24. We maintain our earnings forecasts and estimate 2024/2025/2026 EPS at RMB0.04/0.07/0.10. We estimate 2024 NP from germanium parts/semiconductor materials at RMB21/7mn, and value these businesses at their peers' averages of 46.4/32.8x 2024E PE on Wind consensus, for a fair market value of RMB1,218mn. This, adding on our fair market value for germanium resources of RMB7,217mn, leads to our total fair market cap of RMB8,435mn. Our target price is RMB12.92 (previous: RMB12.55). Maintain OVERWEIGHT.
Market demand fluctuated, product sales showed mixed results
During the period, the company produced 22.80 tonnes of material-grade germanium products (excluding internal sales and contract processing), 2.35 tonnes of infrared germanium products (blanks and lenses) in metal equivalent, 156 lenses & complete systems, 218.3k PV-grade germanium wafers, 9.84 tonnes of optical fiber-grade germanium products, and 47.9k/33.9k gallium arsenide/indium phosphide wafers. Output and sales volume of material-grade germanium products increased yoy due to the delivery of contracts pending at end-2023 and increased market demand. PV-grade products and chemical-compound semiconductor materials also performed well, driven by rising market demand. However, infrared/optical fiber-grade products saw output and sales decline yoy due to temporary demand contraction.
Continued expansion in high-profit sectors
The gross profit margins of material-grade/infrared/PV-grade/optical fiber-grade germanium products/chemical-compound semiconductor materials were 15.93/13/15.76/1.26/20.53% (+3.87pp/-11.49%/-6.94%/-0.98pp/-10.76% yoy). The company is actively extending its industrial chain and developing deep-processed products. By focusing on sales of downstream deep-processed products and chemical-compound semiconductor materials, Yunnan Germanium aims to capture relatively higher-profit segments of the value chain, which are likely to become key drivers for the company’s future growth, in our view.
Risks: downstream demand weaker than we expect; supply increments greater than we expect.

1Q24 losses of RMB11mn; maintain OVERWEIGHT
In 1Q24, Yunnan Germanium logged revenue of RMB131mn (-10.32 yoy), and attributable NP of RMB-11mn (1Q23: RMB-9). We maintain our earnings forecasts and estimate its 2024/2025/2026 attributable NP at RMB28/48/66mn. In our SOTP valuation, we value germanium resources at 5x our 2024E BVPS forecast of RMB2.21, in line with the stock’s 10-year average PB, for our fair market value of RMB7,217mn. We estimate 2024 net profit from germanium parts/semiconductor materials at RMB21/7mn, and value these businesses at their peers’ averages of 34/38x 2024E PE on Wind consensus, for a fair market value of RMB982mn. Our total fair market cap is RMB8,199mn and our target price is RMB12.55 unchanged. Maintain OVERWEIGHT.
Gross profit strained yoy on sales volume decline despite price hikes
For 1Q24, ASPs of material-grade and infrared germanium products climbed, while those of PV-grade/chemical-compound semiconductor materials/optical fiber-grade products declined, leading to an increase of RMB454,600 in revenue. For 1Q24, sales volumes of material-grade/infrared-grade/fiber-grade germanium products decreased, while those of PV-grade germanium/chemical-compound semiconductor materials increased, contributing to a decrease of RMB15.48mn in revenue. Given that the negative impact from changes in sales volume outpaced the positive impact from price changes, the company’s revenue/gross profit dipped 10.32/10.35% yoy in 1Q24, albeit with GPM remaining largely flat yoy.
Losses incurred on elevated overall expense ratio
In 1Q24, sales expense ratio rose 0.63pp yoy to 1.92%, primarily due to increased goods warehousing fees and product sample delivery fees; administrative expense ratio grew 3.57pp yoy to 16.50%; R&D expense ratio climbed to 7.88%; financial fees rallied to 5.64%, mainly owing to increased interest spending for financing.
Eyeing germanium price rally on rising demand/export & tight supply
China has imposed export controls on germanium-related items since 1 August 2023. This has led to market expectations of a tighter global germanium supply. On the export front, with the Ministry of Commerce (MOFCOM) approving certain qualified enterprises to export gallium and germanium-related items, exports are gradually recovering. On the demand side, the cumulative installed capacity of PV in 1Q24 rose 35.9% yoy, and policies like the ‘implementation plan for promoting large-scale equipment renewal and consumer goods trade-in’ in Guangdong province are poised to drive up demand for optical fiber-grade germanium. As demand improves and exports increase amid an anticipated tight supply, we foresee that the price of germanium may continue to rise, benefiting the company.
Risks: weaker downstream demand; volatile raw-material prices; changes in sector policies.