Incident: On October 25, the company released its three-quarter report for 2023. It achieved revenue during the reporting period (400 million yuan, -23.03%) and net profit from the mother (245 million yuan, -23.54%).

Performance is under phased pressure due to the pace of delivery. Growth is expected to resume in the first three quarters of 2023 in the future. The company does a good job of production and preparation to ensure delivery according to customer needs.

Q1-Q3 achieved revenue (207 million yuan, +19.58%)/(109 million yuan, -23.38%)/(84 million yuan, -58.83%), net profit (148 million yuan, +63.68%)/(61 million yuan, -35.34%)/(0.36 billion yuan, -73.67%)/(36 million yuan, -73.67%), Q3 revenue fell 22.94% month-on-month, and net profit fell 40.98% month-on-month, mainly due to normal Q1 delivery, Q2 and Q3 customer production schedule delays, and product delays Due to a slowdown in delivery and a decrease in revenue recognition, it is expected that after subsequent deliveries return to a normal pace, performance growth is expected to resume.

Profitability remains stable, and R&D intensity continues to increase. In the first three quarters of 2023, the company's gross margin was 75.73%, up 1.46pct year on year, net interest rate was 61.28%, down 0.41pct year on year. The slight decline in net interest rate was mainly due to a year-on-year increase of 17.14pct to 24.75% in the period. Among them, the R&D fee rate increased 13.70 pct year on year, mainly due to the continuous acceleration of R&D project investment during the reporting period and a 194.72% year-on-year increase in R&D expenses. Excluding the R&D fee rate, the total cost rate for the other periods was 6.21%, an increase of 3.44pct over the previous year. Among them, the management expense rate increased 2.69 pct year over year, mainly due to the inclusion of depreciation during the third phase of trial production, and management expenses increased by 30.95% year over year.

Production expansion projects are progressing steadily, and operating cash flow has improved. The inventory of 2023Q1-Q3 company increased by 460.64% compared to the beginning of the period, mainly due to the slowdown in delivery during the reporting period. After the pace of subsequent deliveries resumes, it is expected to be realized on the performance side. The number of projects under construction by the company increased by 101.17% compared to the beginning of the period, mainly due to continuous investment in the third phase of the project. According to the semi-annual report, as of June 30, the construction, equipment installation and commissioning of the third phase of the project were basically completed. Currently, it is in the process commissioning and trial production stage. Subsequent production will help increase the company's production capacity and consolidate the foundation of performance.

In addition, the company's net operating cash flow increased by 32258.70% year-on-year in the first three quarters of 2023, mainly due to the recovery of some accounts receivable during the reporting period.

Actively promote the supply of new products and cultivate new growth points in performance. According to the company's announcement, ZT9H carbon fiber is a new product developed by the company under the new demand for certain equipment. It has characteristics such as high strength, high elongation, and high modulus (strength and modulus are more than 18% and 24% higher than ZT7H carbon fiber, respectively). It can meet the application characteristics requirements of aviation and aerospace structural materials, and has a wide range of application scenarios. The company is actively promoting the application of ZT9H. It has now entered the batch supply stage and formed batch sales, which initially met the urgent needs of certain equipment research and development and trial production. Subsequent companies will actively cooperate to ensure delivery. Through collaborative innovation chains and industry chain partners, the company is focusing on promoting the application of ZT9H in related fields. As application scenarios are further enriched, the company is expected to incubate new performance growth points.

Continue to promote production capacity construction and consolidate the foundation for performance growth. The company's current production capacity can be divided into a 100-ton line, a kiloton line and a three-phase project. Among them, according to the company's announcement, the 100-ton line has a production capacity of 120 tons and the kiloton line has a production capacity of 330 tons, which is mainly used to fully guarantee the mature product ZT7H. The third phase of the project has planned three production lines of 200 tons/year (6K) each. According to the semi-annual report, the third phase of the project progressed in an orderly manner according to the plan, and infrastructure construction, equipment installation and commissioning work were carried out in parallel, reaching the state of process commissioning and trial production. As production lines for the third phase of the project are put into operation one after another, the stable supply capacity of the company's serialized products is expected to increase dramatically. While resolving the contradiction between supply and demand, it also lays a solid foundation for the company's performance growth, and helps the company explore aerospace, weapons, ships and other high-end civilian markets.

Investment suggestion: The company is a leading supplier of high-performance carbon fiber in China. With the accelerated release of demand in the downstream aerospace sector, the company's carbon fiber products are expected to benefit the core. Furthermore, the company actively invests and expands production and lays out the aerospace sector. As fund-raising projects reach production in an orderly manner, the company's future performance is expected to grow further. Considering the phased fluctuations in the delivery pace of downstream customers, the adjusted company's net profit from 2023-2025 was 3.5 billion, 7.1 million yuan and 9.1 billion yuan respectively, giving 45 times PE for 23 years, corresponding to a target price of 36 yuan for 6 months, maintaining the “buy-A” rating.

Risk warning: the commissioning of fund-raising projects falls short of expectations; customer development progress falls short of expectations; risk of falling product prices; risk of relative concentration of customers.