Magnetic attraction

Chinese rare earth permanent magnet producer JL Mag Rare-Earth has passed its listing hearing in Hong Kong amid surging demand for electric vehicles and China's ambition to strengthen its grip on the rare earths market.

A dominant producer of rare earths, China has revealed plans to strengthen its prowess in the industry and is also said to be considering restricting exports amid its trade and financial war with America.

Founded in 2008 and listed in Shenzhen in 2018, the firm has seen its A shares soar 90 percent since the beginning of the year.

The company said in its filing to the Hong Kong bourse that last year it ranked second globally in the production of rare earth permanent magnets with a 5.8 percent of market share, and first in high-performance rare earth permanent magnets with a 14.5 percent market share, citing a Frost & Sullivan analysis.

There are broadly four types of permanent magnets - ferrite, aluminium-nickel-cobalt (alnico), neodymium-iron-boron (NdFeB) and samarium-cobalt - with rare earths used in the production of the latter two.

Rare earths are a group of 17 elements used in a diverse range of hi-tech products - from cell phones, electric cars and TVs to computers, lasers and satellites - and vital for cleaner energy.

JL Mag mainly produces NdFeB magnets - the most widely used type of rare earth magnet - which accounted for about 98 percent of its revenues in 2019, 2020 and the first half of 2021. NdFeB magnets are critical to green energy. They are used in the manufacture of motors for electric vehicles, such as in Tesla's engines, and wind turbines, thanks to their high magnetic strength.

RISING DEMAND

Global sales of new energy vehicles rose by 43.9 percent to 2.9 million units in 2020, driving an increase in the global consumption of high-performance NdFeB magnets by 42.6 percent to 9,800 tonnes in the same period, according to Frost & Sullivan.

JL Mag's NdFeB magnets are mainly used in inverter air-conditioners, wind turbine generators and new energy vehicles. The first two accounted for 38.4 percent of its revenues in 2020 with sales to new energy vehicles and automotive parts accounting for 14.2 percent of its revenues last year.

JL Mag sells its products directly to Tesla and BYD, with SAIC Motor, NIO and Li Auto among its end-users. Its customers for inverter air-conditioners include Midea, Gree, Shanghai Highly, Guangzhou Mitsubishi while it also provides magnets to Goldwind, which also owns 8.3 percent in the firm and Siemens Gamesa in the wind power sector.

But it also warned that its customer concentration is high, with the five largest customers combined contributing about 70 percent of its revenues in the last three years.

JL Mag reported a net profit of 351 million yuan (HK$430.12 million) in the first three quarters of 2021, up 130.2 percent year on year.

Meanwhile, the company saw an 80.5 percent rise in revenue to 2.9 billion yuan for the same period.

Also, it posted a net cash flow from operations of 17.5 million yuan in the first three quarters, turning from negative operating cash flows of 76.7 million yuan in the first six months.

China remains JL Mag's major market, with the mainland accounting for 85 percent of its revenues on average over the past three years.

Ganzhou Rare Earth, which is owned by the government of the city of Ganzhou and is one of JL Mag's five largest suppliers, holds a 6.1 percent stake in the company.

Despite having state-owned backers, JL Mag noted that fluctuations in the price of rare earths, which made up over 70 percent of its product costs, could adversely affect its gross profit margin and bottom line.

Prices of rare earths have soared to new records this year with a price index compiled by the China Rare Earth Industry Association skyrocketing 83 percent since the start of the year to 337.8 points.

JL Mag , which focuses on high-end NdFeB magnets, said it held 47 licenses as of July 28 this year, with 19 patents for invention in China. But it still lags behind its rival Beijing Zhongke Sanhuan High-Tech, which also supplies Tesla, and had 170 invention licenses as of last year.

Some of the funds raised from its offering in Hong Kong will be used for the construction of its Ningbo production base, which is expected to commence operations by the end of 2023.

Citic Securities and BNP Paribas would be the joint sponsors for the proposed deal.

CHINESE FORCE

JL Mag's Hong Kong listing comes with China poised to announce a merger of three existing state firms into a new rare earth mega-enterprise called China Rare Earth Group, the Wall Street Journal reported.

Shares of China Rare Earths (0769), which produces rare earth products for electronic devices, soared on the news.

There are also reports that China could restrict the export of rare earth metals to the US amid the prolonged trade war between the world's two largest economies.

The new entity will be created by merging some state firms including Ganzhou Rare Earth, China Minmetals and Aluminum of China and will be based in Jiangxi province in southern China, where JL Mag is located, this month at the earliest, the WSJ said.

Also, China's northern Inner Mongolia regulator is aiming to reach 100 billion yuan worth of rare earth production value by 2025 - an increase of about five times over 2020 figures - and to build the world's largest rare earth trading center in the future.

Six state-run enterprises currently dominate rare earth production in China, with one in Inner Mongolia which has numerous light rare earths. The other five are all located in southern China and focus on supplying the more common type, heavy rare earths.

China accounted for 58 percent of rare earth production worldwide in 2020, down from 80 percent from 2017, but it still produced 85 percent of the world's refined rare earths last year, according to the US Geological Survey.

Despite still being a dominant supplier in the rare earth industry, China is seeking to strengthen further control of the rare earth industry. In January this year, China released draft regulations on the rare earth industry, including quota controls over mining and processing, as well as the import and export of rare earths. This came as the US was collaborating with Australia, aiming to create an alternate supply chain for rare earths.

Prices of rare earths have soared this year amid China's tightening control on the supply although the government raised its annual rare earth output quotas by 20 percent year-on-year to their highest levels on record at the end of September.

Northeast Securities says the supply-demand issue may intensify in the short term as the overall quota at the end of year is not sufficient while the demand will increase as the downstream manufacturers tend to replenish stock before the Chinese New Year.

China International Capital Corporation expects the tight supply situation for rare earths is likely to continue for three to five years, adding that its price will remain stable at a higher level.