Events: In the first three quarters of 2023, the company achieved revenue of 2,011 billion yuan, a year-on-year decrease of 1.12%; net profit of 266 million yuan, a year-on-year decrease of 8.59%. Q3 alone achieved revenue of 672 million yuan, a year-on-year decrease of 2.16%, and realized net profit of 95 million yuan, a year-on-year decrease of 14.44%. As the downstream boom has yet to recover and market competition is intensifying, the company's performance is basically in line with expectations.

Profitability is under pressure in the short term. 2023Q1-Q3, the company's gross profit margin was 26.17%, up 0.13pct year on year; investment income decreased by 9.35 million yuan year on year; credit impairment losses and asset impairment losses increased slightly; net profit margin 13.15%, down 1.09 pct year on year.

Market competition intensified. The company's Q3 gross profit margin was 25.57%, down 0.48pct from the previous year. The increase in depreciation caused by Jienuo's move to a new plant also had an impact on this. The company's Q3 net profit margin was 13.97%, down 2.11pct from the previous year, and the decline was 0.72pct narrower than Q2.

Under industry cycle fluctuations, the expense ratio increased only slightly, and the cash flow and core product performance were steady. 2023Q1-Q3, the company's sales/management/R&D/finance expense ratio was 3.07%/3.71%/4.73%/-0.77%, respectively, +0.21pct/+0.03pct/+0.28pct/-0.31pct; the company's period expense rate was 10.75%, up only 0.21pct year on year. Overall, it remained stable, and the cost control capability was good. In 2023Q1-Q3, the company's net operating cash flow was 168 million yuan, an increase of 9.36% over the previous year. Against the backdrop of industry pressure, the cash flow performance was impressive, showing good operating capabilities. The company's core products, such as modular speed reducers and industrial gearboxes, are resilient, accelerating domestic substitution, and increasing market share against the trend.

Pay attention to research and development, and save energy for future development. In 2023Q1-Q3, the company's R&D expenses were 95 million yuan, an increase of 5.13% over the previous year; R&D expenses have continued to rise in the past five years, and high-end business has made progress. Jienuo completed the relocation of the new plant and equipment configuration, and the gear processing accuracy can reach DIN5 level and above. Guomao Precision successfully relocated to the Changzhou headquarters factory and purchased a new batch of imported equipment to increase the production capacity and quality of homemade core components. Currently, the harmonic reducer business is progressing in an orderly manner, and the product speed ratio can be customized as needed.

Dig deep into business potential and actively explore new markets. The company's new businesses, such as special speed reducers for offshore and construction machinery, have grown: by 23H1, new offshore products had received tens of millions of incremental orders, and speed reducers developed for European cranes had been shipped in batches. The company has accumulated wind power variable propeller and yaw reducer technology to assist wind power OEMs to complete German Lowe's GL certification. The subsidiary Genuo and ABB jointly developed a new prototype of a displacement gearbox and 0 degree straight gear components. The company is actively promoting products overseas. Its speed reducer business covers Russia, Southeast Asia and other regions, and the construction of overseas agency channels is progressing steadily.

Investment advice: The prosperity of the industry is still in the stage of gradual recovery. The company has strengthened product upgrades and cost management, and expanded new business. Future profitability may be expected to gradually improve as market demand recovers. The company's net profit from 2023-2025 is estimated to be 398/5.06/610 million yuan (original forecast value: 465/5.91/711 million yuan), the estimated EPS is 0.60/0.76/0.92 yuan (original forecast value 0.70/0.89/1.07 yuan), and the corresponding PE is 29X/23X/19X respectively, maintaining the “buy” rating.

Risk warning: risk of macroeconomic changes; risk of new business development falling short of expectations; risk of fluctuations in raw material prices.