Event: the company announced that from January to September 2023, the operating income was 928 million, year-on-year + 13.7%, net profit 204 million, year-on-year + 13.37%; single Q3, operating income 315 million, year-on-year-1.09%, return-14.19% net profit.

Concentrated price adjustment by customers is the main cause of short-term performance fluctuations. From January to September, the company's revenue increased by 13.7%. After the holding subsidiary Liyuan Jinhe technical renovation project was successfully put into production in 2022, it entered a capacity climbing period, worked with Liande's existing business to supplement foundry capacity, and the company's production and marketing scale continued to expand. Single Q3 revenue fell slightly, which is also the first year-on-year decline in single-quarter revenue since 2021, mainly due to price adjustment, the company adopts cost-plus model, and long-term stable customers carry out annual pricing according to cost fluctuations. In the context of the relatively low cost of raw materials in 2023, the price adjustment has affected the company's revenue scale to a certain extent.

The profitability range is stable and the cost control ability is outstanding. Q3 in 2023, gross profit 39.42%, year-on-year + 1.8pct, month-on-month + 1.18pct; net profit 21.35%, year-on-year-3.27pct, month-on-2.57pct. The price adjustment did not affect the company's gross profit margin, and the downward cost of raw materials superimposed the company's fine production process control, promoting the gross profit margin year-on-year and month-on-month improvement. Exchange profit and loss is the main reason to depress the company's net interest rate. from the expense side, the expense rate during Q3 is 13.73%, year-on-year + 7.05pct, in which the rates of sales, management, R & D and financial expenses are + 0.21,1.6,1.66 and + 3.58pct respectively. During the period of production expansion, the rate of management and R & D expenses increases in a short period, and the financial expense rate is mainly affected by exchange gains and losses. In 2022, Q3 realized exchange gains, and the current period is a small exchange loss. The company's ability to reduce costs and control fees is outstanding, and the overall profit level is expected to remain basically stable.

Production capacity expansion and market development are not wrong, and the logic of long-term growth remains unchanged. By the end of June 2023, the company has 10 CNC machining workshops, 129 large-scale machining centers, and has an annual casting capacity of 70,000 tons. The company's new production capacity planning is clear: ① subsidiary Zhejiang Mingde "high-precision machinery parts production and construction project" started on schedule. The project will build a new production base with a complete industrial chain of "casting + machining + product assembly". On the basis of tamping the existing business, make use of technical advantages and customer resources to actively layout the field of wind power. The project is scheduled to be put into production in 2023, and according to the company's semi-annual report, the progress of the project reached 44% by the middle of the year. ② plans to set up a Mexican subsidiary with self-raised funds.

The initial investment is 56.56 million US dollars, and the construction period is 2 years. After reaching production, it is proposed to form 38000 precision components with an annual production capacity of 38000 pieces, including compressors, construction machinery and agricultural machinery components. It is expected to increase income by 29.74 million US dollars per year (about 220 million yuan at the exchange rate of October 30). It accounts for about 19.6% of the company's total revenue in 2022. The new production capacity aims to lay the foundation for the company's market development, extending from compressors and construction machinery to the fields of wind power and agricultural machinery. At the same time, the Mexican base will help the company to further expand cooperation channels in overseas markets and expand more overseas leading new customers. at the same time, meet the low-cost supply chain needs of existing customers, and provide support for the sustainable development of the company.

Investment suggestion: taking into account the price adjustment, exchange fluctuations and other factors, we adjust the company's profit forecast. It is estimated that the company's operating income for 2023-2025 will be 1.273 yuan, respectively, with an increase rate of 13.6%, 43.7% and 36.1%, respectively, and a net profit of 2.78 million yuan, 39523 million yuan, respectively. The year-on-year growth rate was 12.3%, 42.1% and 32.4%, respectively, and the corresponding PE was twice that of 18-13-10. From 2024 to 2025, the company is expected to enter the stage of concentrated release of production capacity, with high profits and high growth. The compound growth rate of net profit in 2 years is expected to be about 37%. The compound growth rate of net profit in 2024 is expected to be 20x PE, corresponding to the 12-month target price of 32.8RMB, maintaining the "Buy-A" rating.

Risk tips: large fluctuations in raw material prices; lower-than-expected demand due to lower-than-expected economic recovery; lower-than-expected capacity expansion; loss of important customers; and lower-than-expected business development of acquisition and equity companies.