Event: Daye Co., Ltd. released its 2023 three-quarter report. The company achieved revenue of 4.172 billion yuan in the first three quarters of 2023, +6.91% over the same period last year, and realized net profit of 105 million yuan, reversing losses over the previous year. Among them, Q3 companies alone achieved operating income of 1,498 billion yuan, +2.69% year-on-year, and net profit of 28.09 million yuan, reversing losses year-on-year.

The rise in steel prices had a slight impact, and Q4 profitability is expected to continue to recover. The company's gross sales margin for the first three quarters of 2023 was 7.95%, +7.19pcts year on year, and the net sales profit margin for the first three quarters was 2.87%, +7.3pcts year on year. The company's profit quality improved markedly compared to last year. The company's single Q3 gross profit margin was 7.39%, +8.89pcts year-on-year and -1.93pcts month-on-month. The month-on-month decline in gross margin was mainly due to rising steel prices, while the company's price adjustments required a certain period of time. According to the company's announcement, the company raised product prices in September and October, which is expected to be reflected in Q4 revenue confirmation, and there is room for improvement in the company's profitability.

By restructuring Shengtong's steel cord, the synergy effect is gradually reflected. According to the company's announcement, the first phase of the relocation of the three production areas of Shengtong steel cord has now been relocated and put into operation. Production capacity is expected to return to 200,000 tons this year, the second phase is expected to complete the relocation work by the middle of next year, and the production capacity is expected to reach 250,000 tons after the relocation is completed. The financial situation of Shengtong Steel Cable has gradually improved, and production, sales volume and gross margin have gradually increased. According to the announcement, 23H1 contributed about 58% of the net profit of Daye Group. We believe that with the full commissioning of Shengtong, the “Big Ye” + “Shengtong” brands complement each other's strengths, and the revenue scale and profitability of the company's steel cord and tire ring steel wire products are expected to further increase.

Investment advice

We expect the company's net profit from 2023-2025 to be 1.53/3.03/388 million yuan, respectively, and 21.3/10.7/8.4 times the corresponding PE, respectively, to maintain the “buy” rating.

Risk warning

Prices of raw materials have fluctuated greatly; downstream demand has fallen short of expectations; and the release of production capacity has fallen short of expectations.