Matters:

The company released its three-quarter report for 2023: the company achieved revenue of 1.08 billion yuan in the first three quarters, an increase of 7.56% over the previous year; realized net profit of 155 million yuan, a year-on-year decrease of 15.4%; and realized net profit deducted from non-return mother of 127 million yuan, a year-on-year decrease of 23.9%.

Commentary:

Gross margin continues to improve. The company achieved revenue of 363 million yuan in the third quarter, a year-on-year increase of 10.6%, a year-on-year increase of 6.1% in the first half of the year; realized net profit of 51 million yuan, a year-on-year increase of 7.32%; realized net profit of 41 million yuan, a year-on-year decrease of 7.06%; achieved a comprehensive gross profit margin of 35.3%, an increase of 1.2pct over the previous year; and achieved a net profit margin of 14.0%, a decrease of 2.2 pct over the previous year. The company's gross margin showed a continuous improvement trend in the third quarter. It is expected to be mainly affected by the company's increased level of factory automation and reduction in raw material costs. It is expected that gross margin will maintain a positive trend in the fourth quarter.

Expense rates increased during the period, and consolidation increased fixed assets significantly. The company's sales expense ratio for the third quarter was 8.92%, up 1.1 pct month on month; management expense ratio was 5.03%, up 0.7 pct month on month; and R&D expense ratio was 10.5%, up 2.5 pct month on month. The increase in the cost rate during the company period is quite obvious. It is expected to be mainly affected by the increase in the number of new hires in the third quarter. Furthermore, the company's fixed assets at the end of the third quarter were 481 million yuan, a significant increase from 361 million yuan at the end of the first half of the year. Depreciation and amortization expenses are expected to increase in the third quarter.

The recovery of the manufacturing industry has nurtured elasticity, and there is great potential for PLC and servo imports to replace them. Domestic industrial product inventories are expected to enter an upward cycle, while measures to stabilize the economy, such as the trillion dollar special treasury bonds, continue to increase, and the manufacturing boom is expected to enter a new round of overall recovery. Furthermore, as the core component of the control layer, PLC is of great significance to achieve an autonomous and controllable strategy. There is plenty of room for import substitution, and the company still has a lot to do. The company's “control+drive+vision” complete solution has significant advantages, helping the servo to maintain relatively rapid growth.

Investment suggestions: Considering that the recovery of the manufacturing industry in the second half of this year fell short of expectations, and the company's general component servo and PLC revenue growth rate fell short of expectations due to demand, we slightly lowered the company's profit forecast. The estimated revenue for 2023-2025 was 15.0, 18.9, and 2.33 billion yuan (previously 16.1, 19.9, 2.38 billion yuan); net profit was 2.24, 3.05, and 397 million yuan respectively (previously 259, 3.31, 420 million yuan); EPS was 1.59, 2.17, respectively $2.82, combined with the average valuation of comparable companies and the company's large moat of small PLCs in the control layer, maintained 20 times the PE given to the company in 2024, adjusted the target price to 43.4 yuan, and maintained a “strong push” rating.

Risk warning: The prosperity of the manufacturing industry falls short of expectations; the expansion of emerging industries falls short of expectations; the recovery in profitability falls short of expectations, etc.