Event: the company released its results for the third quarter of 2023, with operating income of 364 million yuan,-10.0% year-on-year, and net profit of 84 million yuan,-13.5% year-on-year. Among them, 23Q3 achieved an operating income of 128 million yuan in a single quarter, with a year-on-year income of + 0.2% and a month-on-month profit of-2.4%, with a net profit of 30 million yuan, + 0.1% year-on-year and-1.4% compared with the same period last year.

The turning point of overseas power tools is coming, and the performance flexibility is expected to be released gradually. 1) the downstream applications of the company's products are mainly power tools, including electric drills, electric planers, electric wrenches and so on. Since 2022, the global power tools industry has experienced a stock-accumulating cycle, and the overall downstream demand is under pressure, resulting in a decline in revenue.

After entering 2023, the inventory margin of the global power tools industry has been eliminated. Take Stanley Black, the company's largest customer, as an example, 2023Q2's revenue increased by 7.7% month-on-month, inventory fell 8.7% month-on-month, net profit turned into profit, and performance improved significantly. 2) looking back, with the continuous advance of downstream de-warehousing, power tool shipments are expected to pick up again and drive the company's profits to continue to improve.

The overall decline in raw material prices has promoted the repair of the company's gross profit margin. 1) the upstream raw materials of the company are mainly PA6 and PA66 slices, driven by the localization of caprolactam and adiponitrile, the prices of PA6 and PA66 slices have continued to decline in recent years, in which during the 2023Q1-Q3 period, the average price of PA6/PA66 slices was 13184 pound 20624 yuan / ton, which was 1131Uni7122 yuan / ton lower than that in 2022. The company's products are priced by the cost-plus method, and the price adjustment cycle is longer, and the decline in the price of raw materials is conducive to the thickening of the company's gross profit margin. During the 2023Q1-Q3 period, the company's sales gross profit margin is 33%, which is about 5pct higher than that in 2022. 2) looking back, the domestic PA6 and PA66 industry chains are still in the production expansion cycle, and the compound growth rate of production capacity is expected to reach 13% and 52% from 2022 to 2025. Under this background, the price of raw materials is expected to run low for a long time, which is beneficial to the cost reduction of companies and the penetration of terminal applications.

Fund-raising projects are promoted in an orderly manner, and R & D can contribute to the promotion of high-end penetration. 1) the company's existing production capacity of modified plastics is about 30,000 tons, another 60,000 tons of fund-raising projects, a total of 8 production lines are under construction, of which four production lines in the first phase are expected to be put into production by the end of 2023, and the remaining four will be put into production by the end of 2024. after full production, the company's production capacity will double, at present, the new plant and infrastructure have been initially completed, and equipment installation is being promoted as planned. 2) in R & D, the company plans to invest 150 million yuan in the construction of R & D test centers and laboratory projects. Although the project does not directly produce economic benefits, it will further enhance the company's R & D capability of modified plastic products and promote the company's penetration in the high-end market. The project is expected to be completed and put into use by the end of 2024.

Profit forecast and investment rating: we maintain the company's homed net profit of 1.2,1.8 and 230 million yuan from 2023 to 2025, which corresponds to PE of 20.4,13.2 and 10.0 times respectively according to the closing price on October 24. Marginal improvement of terminal demand, orderly progress of fund-raising projects, and maintenance of "buy" rating

Risk hint: the release of capacity is not as expected, the recovery of demand is not as expected, and the competition for modified plastics is intensified.