Incidents:

The company released its report for the third quarter of 2023. 2023Q1-Q3 achieved revenue of 16.910 billion yuan, +15.77% year-on-year; realized net profit of 405 million yuan, +31.76% year-on-year; and realized net profit of 328 million yuan, +10.40% year-on-year. Among them, Q3 achieved revenue of 6.242 billion yuan in a single quarter, -3.10%/+2.23% year-on-month; achieved net profit of 158 million yuan, +4107.86%/+69.26%, respectively; and achieved net profit deducted from non-return to mother of 152 million yuan, +6649.98%/+219.01% year-over-year. The company's operations were relatively stable in the third quarter, and profits recovered.

Comment:

Raw material prices are stable, impairment losses are reduced, and cost control is good, promoting Q3 profit recovery. The reasons for the sharp year-on-year increase in the company's net profit in the third quarter include 1) the market price of copper, the main raw material, fluctuated sharply in the same period last year, and inventory impairment losses were high. The copper market price was relatively stable during the reporting period, compared to not being affected by fluctuations in raw material prices; 2) the amount of non-operating profit and loss increased from the beginning of the year to the end of the reporting period; 3) the loss of changes in the fair value of hedging instruments and credit impairment losses decreased compared to the previous period. Q3 The cost rate for a single quarter was about 3%, and the sales/management/R&D/finance expense ratio was 1.39%/0.69%/0.44%/0.48%, respectively. The financial expense ratio decreased by 0.25/0.75pct year-on-year, respectively.

The company strengthened cost control combined with a decline in impairment losses, and increased profitability in a single quarter.

Plan the Pingtan submarine cable base to strengthen Fujian's coastal location advantages. The company started with land cables and has broken through many barriers to enter the submarine cable field in recent years. The company received a number of submarine cable orders after entering offshore wind power in 2021. The winning bids since this year include the 220 kV high voltage transmission cable for the BW project in the north of the Shandong Peninsula and the 35 kV array cable for the Daishan 1 project. We expect that the increasingly rich submarine cable delivery performance will form a good reputation in the industry, which is expected to solidify the foundation for the company to receive subsequent orders. At the same time, the company announced that it plans to invest abroad and sign an investment agreement. It plans to invest in the construction of a submarine cable base project in Jinjing Town, Pingtan Comprehensive Experimental Zone, Fujian Province. The total investment is estimated at 2 billion yuan, and the overall construction cycle is 2 years. Fujian Province is rich in ocean wind resources. After the submarine cable base that the company has invested in this time is put into operation, the transportation time of large submarine cables can be greatly shortened. While saving costs, it can also fully guarantee the progress of the construction project and future operation and maintenance work. Furthermore, Pingtan's geographical location and port resources are excellent, and the company has laid out a market with broad prospects ahead of schedule, which is conducive to meeting the long-term cable needs of neighboring provinces and Southeast Asia's Belt and Road countries.

Wire and cable product structure has been optimized, and profit margins have rebounded month-on-month. The wire and cable industry was affected by the macroeconomic environment in the first half of the year, and demand fell short of expectations. The company lowered land cable prices to benefit consumers. The gross margin of 2023H1 power cables was 4.92%, and the gross margin of power cables used in electrical equipment was 9.52%, all lower than the average of previous years. Since the second half of the year, the company's focus on high profit margin orders has begun to show results. The Q3 comprehensive gross margin was 6.14%, +1.47pct month-on-month, and the net margin was 2.53%, +1pct month-on-month. In the face of a slight month-on-month decline in Q3 single-quarter revenue, profit margins have rebounded. It is expected that as China's economy recovers and power construction progresses, the company's power cables and wire and cable business for electrical equipment will grow steadily.

Profit forecast and investment rating: The company occupies a leading position in the cable industry in the region, seizes offshore wind power development opportunities to explore the submarine cable market, and is expected to fully benefit from the steady growth of the national economy and the accelerated recovery of offshore wind power. We expect the company to achieve revenue of 232.13/273.16/31,785 billion yuan in 2023-2025, a year-on-year increase of 12.4%/17.7%/16.4%; net profit of 5.45/7.38/951 billion yuan, an increase of 48.9%/35.3%/29.0% year on year. The corresponding EPS is 1.30/1.76/2.28 yuan, and PE is 15/11/9 times, maintaining the “buy” rating.

Risk warning: risk of sharp short-term fluctuations in copper prices; risk of postponement of offshore wind power projects and failure to meet expectations; risk of macroeconomic downturn; risk of changes in industry policy; risk of increased market competition, etc.