Q3 Performance continued to improve, and domestic replacement companies that continue to benefit from industrial control products released their 2023 three-quarter report. 2023Q1-Q3 achieved operating income of 1,081 billion yuan, +7.6% year-on-year, and net profit of 155 million yuan, -15.4% year-on-year. Among them, the company's Q3 revenue was 363 million yuan, +10.6% year-on-year; net profit was 51 million yuan, +7.3% year-on-year; performance continued to improve, and overall performance was in line with expectations. The company is a small PLC industrial control leader. The six major downstream industries, such as textiles, packaging and printing, are highly correlated with the degree of economic recovery. Domestic PMI slowly climbed in 2023Q3. The overall recovery is still weak, and growth is flat. However, considering that the economy is expected to recover further in the future, and that the company's development of the medium to large PLC market will raise gross profit levels and continue to benefit from domestic substitution, we maintain our profit forecast. The net profit of the company from 2023-2025 is expected to be 2.28/2.81/360 million yuan, and the current stock price corresponding to PE is 22.3/18.1/14.1 times. Maintain a “buy” rating.

Q3 The gross profit level has improved, and the period's expenses have increased

2023Q1-Q3, the company's gross profit margin was 33.7%, year-on-year 2.86pct; net profit margin was 14.3%, y-3.88pct. However, the gross profit level for the Q3 quarter improved. The gross profit margin on sales was 35.3%, 0.89pct year-on-year, and +1.2pct month-on-month. The company's overall rate increased during the period. The Q1-Q3 sales rate/management rate/financial rate/R&D rate reached 8.62%/4.74%/-0.28%/9.43%, respectively, +1.31/-0.09/+0.14/+0.59 pct. The reason for the decline in the company's gross margin was the increase in the share of revenue from servo systems with low gross margin, and the increase in expenses during the period was due to the company continuing to increase R&D expenses and promote the construction of a new sales network.

Servo products continue to be promoted, and the servo product bundling strategy of companies actively developing high-value PLC fields continues to work. The share of servo product revenue in the first half of 2023 has increased to 50.2% from 43.5% in the first half of 2022. Furthermore, as a leading small PLC in China, the company is actively seeking the extension of medium-sized PLC products and accelerating expansion in high-end manufacturing industries such as new energy and semiconductors. It is expected that it will continue to benefit from domestic replacement of industrial control products, optimize product structure, and usher in continuous restoration of profitability. In the context of the gradual restoration of the future manufacturing boom, the company's revenue and performance are expected to increase further.

Risk warning: The recovery in manufacturing prosperity fell short of expectations, the company's progress in developing new markets fell short of expectations, and the international situation and geopolitical risks.