JL Mag Earnings: Margin Remained Under Pressure but With Signs of Recovery; H-Shares Undervalued

Narrow-moat JL Mag reported in-line first-quarter revenue, but the gross margin recovery pace was slower than expected. While first-quarter net profit was up 9% year over year to CNY 178 million, it was lifted by one-off gains. Excluding nonrecurring items, core net profit declined 19% from the prior-year quarter. We reduce our fair value estimate to HKD 27 (CNY 24) from HKD 28 (CNY 25), which implies a 2023 P/E ratio of 25 times on 23% 2022-25 net profit CAGR. At the current price, H-shares are trading at Morningstar 4-star territory. The A-shares, at a 37% premium to its H-shares, are fairly valued.