3Q23 performance is basically in line with our expectations.

The company announced 1- 3Q23 performance, revenue achieved 990 million yuan, down 13.6% at the same time, net profit attributable to parent achieved 87.38 million yuan, down 31.1% at the same time; quarterly, 1Q/2Q/3Q23 revenue year-on-year respectively-19.5%/-9%/-12.6%, net profit attributable to parent respectively year-on-year loss/+0.5%/-31%, Q3 performance basically met our expectations.

Trend of development

1. The company's Q3 revenue continues to improve, and follow-up orders are expected to improve. 3Q23 Company realized revenue of 360 million yuan,-12.6% year-on-year. We expect that after the United States imposed a 7.5% tariff on pet disposable products exported from China since June, the company lowered the shipment price of some products, and overseas customers are still in the de-stocking stage, resulting in year-on-year pressure on the revenue side. However, with the continuous decline of overseas inventory and the stabilization of demand, the company's revenue continues to improve quarterly. The revenue of 2Q/3Q23 is +21.4%/+3.8% month-on-month respectively. We expect that the new customers of pet diaper pad, pet diaper pants and other products of the follow-up company are expected to be successfully introduced, and overseas orders are expected to gradually improve; with the rise of domestic scientific pet maintenance demand, the company's domestic business income is expected to maintain rapid growth.

2. The fall of raw material prices drives the gross profit rate to improve, and the decrease of exchange income drags down the net interest rate in the short term. At the gross profit end, the gross profit margin of Q3 of the Company was 21.9%, with a year-on-year/month-on-month increase of 6.6ppt/3.3ppt respectively. We expect that the main reason is that the prices of raw materials such as fluff pulp and toilet paper will fall. At the expense end, the Q3 sales/management + R & D/financial expense ratio of the Company was +0.7ppt/flat/+5.3ppt respectively year-on-year, among which the increase in financial expenses was mainly due to the year-on-year decrease in exchange income of the Company. Under the comprehensive influence, the company Q3 realized a net interest rate of 11.9%, down 3.2ppt.

3. Pay attention to the follow-up order repair trend and raw material price trend. We believe that pet diaper pads, pet diapers and other products have high frequency demand, and the terminal demand has certain toughness. According to the General Administration of Customs, China's paper pulp, paper and other sanitary products (company pet hygiene products declaration category) September exports increased by 12.3%, year-on-year growth rate in four consecutive months after the first positive. We expect that the inventory of major customers of Amazon and other companies has dropped to a lower level, and with the accelerated development of new customers such as PetSmart, Sam and Target, the company's orders in hand are expected to continue to improve, driving continuous improvement in revenue. At the same time, the current price of the company's main raw materials has fallen back to a low level, and we expect that the profitability of subsequent companies is expected to stabilize upward, paying attention to the fluctuation trend of raw material prices such as fluff pulp.

Profit forecast and valuation

The 23/24 year earnings forecast remains unchanged, and the current stock price corresponds to 18/16 times P/E in 23/24 years. Maintain outperform industry rating and target price unchanged, corresponding to 24/21 times P/E in 23/24 years, with 32% upside compared with current share price.

Risk

The price of raw materials fluctuates greatly; the exchange rate fluctuates sharply; core customers are lost.