Huazhong CNC released the first three quarter reports. Revenue for the first three quarters was 1,296 million yuan, up 33.31% year on year; net profit was 33.6191 million yuan, down losses year on year; of these, revenue for the third quarter was 410 million yuan, up 18.73% year on year; and net profit was 1,4912 million yuan, reversing losses year on year. The increase in the company's revenue and performance is mainly due to the expansion of the company's business scale in the CNC system and machine tool sector, and the robot and intelligent production line sector.

Expense control has shown results, and Q3 net profit margin and gross margin have all improved. The company's 23Q3 gross profit margin was 37.54%, up 1.05 pct year on year and a significant increase of 7.77 pct over the previous year. The Q3 fee rate improved markedly. With the exception of a slight increase in the financial expense rate, all other rates declined year on year, and the comprehensive fee rate decreased by 3.28 pct to 40.96% year on year. The increase in gross margin combined with a decrease in the cost ratio, and the Q3 net profit margin increased 1.92pct to -0.92% year on year.

The operating cash flow is good, and the scale of production has expanded. The net cash flow generated by the company's operating activities in the first three quarters was RMB 51.127,700, a sharp increase of 114.74% over the same period last year. The improvement in cash flow was significant, mainly due to an increase in operating repayments. The net cash flow from investment activities decreased by 69.72% compared to the same period of the previous year, and the net cash flow from fund-raising activities increased by 84.01% year on year. Mainly affected by the increase in project investment, the company's projects under construction increased by 246.78% over the same period last year.

Profit forecast and investment advice: We expect the company's net profit from 2023-2025 to be 1.1/2.0/ 270 million yuan respectively, up 568%/77%/34% year on year. Considering the company's leading position in the field of high-end CNC systems and the collaborative layout in the fields of industrial robots and intelligent production lines, there is plenty of room for performance growth under the potential of domestic substitution. We gave the company a PE valuation of 40 times net profit from the parent in 24 years, corresponding to a reasonable value of 39.89 yuan/share, and maintained a “buy” rating.

Risk warning: risk of macroeconomic fluctuations and industry fluctuations; risk of industry and market competition; risk of product and technology development; risk of fund-raising projects falling short of expectations.