Recently, Xingyuan Zhuomai (301398.SZ) announced that it had received a notification of fixed point from a certain automotive components manufacturer, which will develop and supply magnesium alloy reducer housing products for new energy vehicles. The total sales amount is expected to reach approximately RMB 170 million over the next three years.

As a leading enterprise in magnesium alloy die-casting components, Xingyuan Zhuomai has enjoyed stable growth in recent years, relying on the dual-wheel drive of magnesium and aluminum businesses to fuel rapid company development. Amid the trend of automotive lightweighting, Xingyuan Zhuomai is actively transforming into the field of large and medium-sized components, with the potential to further unlock growth opportunities.

Gross margin significantly higher than the industry average

After more than two decades of development, Xingyuan Zhuomai has gradually formed a development model driven by both magnesium and aluminum businesses. In the first half of 2024, Xingyuan Zhuomai's magnesium alloy products generated revenue of RMB 118 million, representing a year-on-year increase of 25.87%, accounting for 64.57% of total revenue; aluminum alloy products generated revenue of RMB 56 million, accounting for 30.54% of total revenue. The company's core business has developed steadily, with magnesium alloy products contributing the main incremental revenue.

The steady development of the core business has driven Xingyuan Zhuomai's performance to continue to improve. In the first half of 2024, the company achieved revenue of RMB 183 million, a year-on-year increase of 7.11%. In the second quarter, the company achieved revenue of RMB 101 million, a year-on-year increase of 11.28% and a quarter-on-quarter increase of 22.73%, setting a new record for quarterly revenue; net profit attributable to shareholders was RMB 19 million, a quarter-on-quarter increase of 9.28%.

In terms of gross margin, in the first half of the year, the gross margins of Xingyuan Zhuomai's magnesium alloy products, aluminum alloy products, and mold products were 32%, 31.69%, and 72.09%, respectively. It should be noted that the gross margin of die-casting products is the primary factor influencing changes in the company's core business gross margin. Affected by factors such as trade policies and fluctuations in raw material prices, the gross margin of die-casting products has fluctuated slightly in recent years.

However, this is of little consequence. In the first half of 2024, Xingyuan Zhuomai's overall gross margin reached 33.94%, significantly higher than the industry average of 17.19%. Compared to competitors in the same industry, Xingyuan Zhuomai still holds a significant advantage.

In fact, Xingyuan Zhuomai enjoys a first-mover advantage in the magnesium alloy sector, with a more comprehensive product line. The company is one of the earliest domestic enterprises engaged in the research and development and production of magnesium alloy automotive castings, with its first magnesium alloy product entering the North American market in 2015.

Compared to domestic companies engaged in magnesium alloy casting business, Wanfeng Auto Holding's subsidiary Meridon focuses on magnesium alloy automotive dashboard castings, while Yunhai Metal has integrated upstream magnesium alloy resources. Xingyuan Zhuomai, on the other hand, boasts a richer product matrix. The company's magnesium alloy products primarily include automotive headlamp heat dissipation brackets, automotive seat armrest structural components, automotive center console structural components, and automotive display brackets.

From Aluminum to Magnesium

Founded in 2003, Xingyuan Zhuomai initially focused on the research, development, production, and sales of automotive die-casting molds. In 2006, the company began to expand into the downstream aluminum alloy die-casting sector; in 2009, the company shifted its research focus to the production and development of magnesium alloy products; in 2014, following the successful research, development, and mass production of its first magnesium alloy automotive headlamp heat dissipation bracket, Xingyuan Zhuomai officially entered the magnesium alloy automotive components sector; in 2022, the company successfully listed on the Shenzhen Stock Exchange.

Judging from Xingyuan Zhuomai's development trajectory, the company has consistently aimed to provide downstream automotive manufacturers with lightweight automotive structural components from the materials end. The shift from aluminum alloy castings to magnesium alloy castings represents the company's choice of process and direction on the path to lightweight materials. On the path to automotive lightweighting, Xingyuan Zhuomai adheres to the dual-wheel drive of magnesium and aluminum alloys, emerging as a leader in the automotive lightweighting industry.

From an industry perspective, automotive lightweighting is an inevitable trend in the future development of the automotive industry, with an even more pressing demand for lightweighting in new energy vehicles. Relevant studies have shown that every 10% reduction in weight of a new energy vehicle can increase its average driving range by 5% to 8% and reduce power consumption by 5%. As new energy vehicles continue to increase battery capacity to extend driving range, they must also reduce weight starting with body components. To achieve automotive lightweighting, materials are paramount.

Currently, the mainstream automotive lightweight material is aluminum alloy, which has relatively mature applications in the automotive sector, but automakers lack the impetus for substitution. Magnesium alloy has a relatively short history of large-scale application, and there is significant room for growth in automotive die-casting production. Under the same specifications, replacing aluminum alloy with magnesium alloy results in a weight reduction of 25% to 35%, a more pronounced effect. With continuous improvements and upgrades in magnesium alloy processing technology, magnesium alloy is poised for significant growth in the future.

Southwest Securities believes that magnesium alloy castings are still in the early stages of development in the automotive sector, with enormous potential for growth. According to the "China Lightweight Technology Development Roadmap Plan," as a major producer of automotive components, China's magnesium alloy automotive die-casting market capacity is expected to reach 689,000 tons in 2025 and 1,241,000 tons in 2030, with the scale of magnesium alloy applications in the automotive sector continuing to increase rapidly.

Currently, Xingyuan Zhuomai has applied its magnesium alloy products to automotive steering wheels, automotive seat structural components, display screen structural components, and headlamp heat dissipation brackets. From 2021 to 2023, Xingyuan Zhuomai's magnesium alloy die-casting business generated revenue of RMB 123 million, RMB 152 million, and RMB 212 million, respectively. In the first half of 2024, the company's magnesium alloy products generated revenue of RMB 118 million, a year-on-year increase of 25.87%.

With the transition from aluminum to magnesium, Xingyuan Zhuomai has found its 'magnesium' answer on the path to automotive lightweighting development.

Focusing on Large and Medium-sized Components to Create New Growth Poles

In recent years, Xingyuan Zhuomai has adapted to the trend of new energy vehicle lightweighting, actively transforming into the large and medium-sized components market, with product structures evolving from small to large, and high-priced individual products poised to create new growth poles.

It is understood that the large-scale application of large and complex magnesium alloy automotive castings is one of the development directions for magnesium use in automobiles. After years of in-depth research, Xingyuan Zhuomai has successfully designed and developed large and medium-sized magnesium alloy automotive components such as new energy vehicle powertrain housings, magnesium alloy display backplates, and magnesium alloy automotive center console frames, which have been successfully applied and received recognition from brand manufacturers and consumers.

The successful mass production of Xingyuan Zhuomai's representative products, the integrated housing sub-assembly EV-400 and motor end cap EV-400, marks a 0-1 industrial breakthrough for magnesium alloy materials in complex large-structure powertrain housings.

As Xingyuan Zhuomai's magnesium alloy die-casting technology continues to mature and the large-tonnage die-casting equipment in its fundraised investment projects are gradually installed, the company is also extending its research and production into large automotive components such as magnesium alloy instrument panel crossbeams (CCB) and magnesium alloy automotive seat frames. As the company continues to develop large and medium-sized components, the per-vehicle supporting volume has shown a notable increase.

Previously, Xingyuan Zhuomai's magnesium alloy products primarily included magnesium alloy headlamp heat dissipation brackets and automotive seat armrest structural components, with relatively limited product types and mostly small and medium-sized automotive components. The average selling price (ASP) of headlamp brackets and armrest components ranged from tens to hundreds of yuan.

Today, Xingyuan Zhuomai's pioneering integrated ASP for magnesium alloy powertrain housings is between RMB 800 and RMB 1,000. This product has been mass-produced and integrated into SAIC Motor's IM LS6/LS7 and ROEWE Marvel R/ES9, further enhancing product value and market competitiveness. According to data from Ningbo Securities, the average price of the company's large and medium-sized magnesium alloy castings is approximately 4 to 5 times that of standard magnesium alloy castings.

In November 2023, Xingyuan Zhuomai signed an investment agreement with the Ningbo Fenghua Economic Development Zone Management Committee, planning to invest RMB 1.01 billion locally to build a production base with an annual capacity of 3 million high-strength large magnesium alloy precision formed automotive components.

With the increase in prices of high-end products and the gradual release of production capacity, Xingyuan Zhuomai, as a "pioneer in magnesium alloy die-casting," is poised to achieve volume and price growth simultaneously, further unlocking growth potential and promising future performance growth.