Description of the event

The company released financial reports: Revenue for the first three quarters was 1.27 billion yuan, up 6% year on year, imputed net profit was 117 million yuan, down 19% year on year, and deducted non-net profit fell 18% year on year. Revenue for the third quarter alone was 440 million yuan, up 9% year on year, imputed net profit was 36 million yuan, up 5% year on year, and net profit after deducting 9 percent year on year.

Incident comments

The overall growth is steady, and the income from high efficiency and energy efficiency is impressive. The company's revenue for the first three quarters increased 6% year on year. By sector, clean air revenue increased 3% year on year (9% after deducting Youyuan's export revenue), and the energy efficiency business increased 12% year on year. In the third quarter alone, the company's revenue increased 9% year on year. Among them, clean air revenue fell 12% year on year, and energy efficiency business increased 45% year on year. In the third quarter, energy efficiency revenue increased particularly rapidly, mainly due to the contribution of new products such as glass wool insulation materials for construction.

Expenses increased in a single quarter, and profitability declined slightly. The gross margin for the first three quarters was about 24.8%, down 2.6 percentage points year on year, mainly for new construction projects, and production capacity has not yet been fully released; the cost rate for the first three quarters was about 14.7%, down 2.0 percentage points from the previous year; however, estimated credit impairment losses increased by about 8 million yuan over the previous year. In the end, the net interest rate attributable for the first three quarters was about 9.3%, down 2.8 percentage points year on year. Looking at the third quarter alone, gross margin was about 25.9%, up 1.7 percentage points year on year and 0.7 percentage points month on month. After new construction projects gradually reached production and sales, there were signs of improvement in gross margin; however, the cost rate increased month-on-month. The cost rate for the third quarter period was about 17.0%, about the same year on year, up 3.6 percentage points from month to month. Sales, management, R&D, and financial expenses increased 1.0, 0.2, 1.3, and 1.2 percentage points month-on-month, respectively. In the end, the company's net interest rate for the third quarter was about 8.1%, down 0.3 percentage points from the previous year and 2.7 percentage points from the previous quarter.

Enter energy-saving glass wool insulation materials for buildings to achieve import substitution. In order to adapt to the restructuring and industrial upgrading of the green building insulation industry, the company is actively entering energy-saving glass wool insulation materials for buildings. The company put into operation the first building insulation glass wool production line at the end of 2022, with a design capacity of 18,000 tons per year, and the second production line in mid-2023. The total production capacity of the two designs reached 25,000 tons per year. In April 2023, the company launched the second phase of the building insulation glass wool plan, and added an LNG highly elastic insulation felt production line with an annual output of 15,000 tons. It is expected to be put into operation in March 2024. The company has begun to lay out production, sales, service networks and bases for building insulation materials in East China, South China, and North China to further open up the domestic middle and high-end market and realize the import and replacement of building insulation glass wool materials, and has also begun selling to overseas markets.

Focusing on material production is a future strategy for further improving technology. The company plans to transfer 70% of Longyuan Environmental's shares to MANN+HUMMEL Singapore Holdings. Previously, revenue from purification equipment fluctuated along with new construction demand for panels, pig houses, semiconductors, etc., but after excluding purification equipment, the company's revenue grew at a compound rate of about 15% in 2018-2022, and the materials business showed stronger growth and competitiveness.

The acquisition helps the company in the following areas: 1) Profitability and business quality may be improved. Competition in the filtration equipment business is fierce, profit margins are low, and cash flow is weak; 2) material-side sales can target more purification equipment companies and promote their material advantages to more global users; 3) cooperate with filter leader MANN+HUMMEL Group to jointly expand application fields in the long-standing environment. In particular, MANN+HUMMEL is deeply involved in the automotive filtration business, which can help the company expand its layout in the field of new energy vehicles.

The company's performance in 2023 is estimated to be 180 million yuan (the long-term environment is still considered in 2023, and the estimated contribution profit is 0.3 billion yuan), and the 2024 performance is 240 million yuan. The corresponding valuations are 25 and 19 times, respectively, and continue to be recommended.

Risk warning

1. The pace of recovery in downstream demand is lower than expected;

2. The cost of raw materials or energy has risen sharply.