2023 Q3 results: In the first three quarters of 2023, the company achieved operating income of 1,336 billion yuan, +10.26%; net profit of 327 million yuan, +38.99%; net profit after deduction of 311 million yuan, +37.95%, of which Q3 achieved operating income of 538 million yuan, -5.67%, +49.16% over the previous year; net profit of 126 million yuan, +7.70%, +25.59%; net profit of 121 million yuan, +8.52% over the same period; net profit from net income of 121 million yuan, +8.52%, YoY Compared to +29.35%.

Q3 Profitability increased year-on-year, and forging sales increased significantly month-on-month. On the profit side, in the first three quarters of 2023, the company's overall gross sales margin was 35.49%, year-on-year +7.03 pct, net sales margin 24.46%, year-on-year +5.05 pct; 2023Q3 single-quarter gross profit margin 35.49%, y-5.62 pct, month-on-month -1.25 pct, net sales margin 23.46%, year-on-year +2.92 pct, month-on-month -4.40 pct. The commencement of offshore wind power in Q3 of 2023 fell short of expectations, and demand for large megawatt castings was insufficient, causing pressure on the casting business. The capacity utilization rate of Dongying Phase I fell short of expectations. We expect that as the volume of the casting business drives the scale effect and the increase in the proportion of hollow forging of internal hole spindles, the company's profitability is expected to increase month-on-month. On the sales side, according to estimates, the overall shipment volume for Q3 in 2023 was about 50,000 tons, including about 40,000 tons of forged spindles, an increase of 60% over the previous month; other precision shafts were about 70,000 tons. Wind power installations recovered in July, and the company's Q3 shipments began to rise. We expect Q4 spindle shipments to exceed Q3, with annual shipments reaching 170,000 to 180,000 tons.

Casting production capacity is yet to be released, and precision shaft production capacity is planned and increased. In line with the development trend of sea breezes, the company is actively deploying large-scale wind power casting production capacity. It has now passed the factory certification of 8 domestic and foreign customers. It is estimated that the Dongying plant will reach more than 80% in 2024H2, and the casting production capacity will reach 120,000 tons at that time; in 2024, the forging production capacity is expected to reach 200,000 tons, including 150,000 tons of spindles and 50,000 tons of other precision shafts. The company flexibly switches the share of production capacity of other precision axes, reduces the impact of fluctuations in the wind power industry on the company's production capacity, and combines fine management. It is expected that the gross margin of other precision axes will still have room to rise.

The equity incentive plan has been implemented to enhance confidence in enterprise development. The company issued the announcement and list of stock option incentive plans on October 30, 2023, and determined that October 27, 2023 was the first grant date of this incentive plan. At a price of 29.77 yuan/share, 1,601,700 stock options were granted to 53 incentive recipients who met the grant conditions. The number of first grants reached 53 people, including 7 senior managers, including the vice chairman, and 46 middle managers.

Investment suggestions: As the leading wind power spindle industry, the company has advantages in technology, production capacity, customers and profitability, vigorously expands the casting market, and expands the market share of wind power spindles. We expect the company's operating income from 2023-2025 to be 21.36/31.37/4.135 billion yuan, a year-on-year increase of 17.93%/46.85%/31.80%; net profit of 5.01/6.79/857 billion yuan. The year-on-year growth rate is 42.29%/35.40%/26.22%, EPS is respectively 1.54/2.09/2.63 yuan, corresponding to PE, is 20/15/12 times, maintaining the “increased holdings” rating.

Risk warning: the risk of wind power installations falling short of expectations, raw material price fluctuations, production expansion plans not progressing as expected, exchange rate fluctuations, and foreign exchange policy changes.