The company released its three-quarter report for 2023. During the reporting period, production capacity expansion was gradually realized, and high downstream prosperity led to an increase in shipping volume. Scale effects were evident, profitability increased, and future performance growth was highly certain. The hydrogen energy & high-purity quartz sand business went from 0 to 1, opening up room for the company to grow, and future contributions can be expected to increase. The target price for 2024 was 21 yuan to maintain the “buy” rating.

The release of diamond wire production capacity boosted revenue growth, and performance grew by leaps and bounds. 2023Q3 achieved operating income of 305 million yuan, +83.6% year-on-year; net profit of 79 million yuan, +156.8% year-on-year; net profit after deduction of 80 million yuan, +159.2% year-on-year. During the reporting period, the company's diamond line production expansion plan progressed steadily, compounded by a high level of downstream prosperity. The company's production and sales volume increased significantly compared to the same period last year, shipment volume increased month-on-month, and there were sufficient orders on hand. The pace of the company's production expansion is in line with the expansion of downstream demand. The increase in sales scale is sustainable and highly deterministic, injecting sufficient momentum into the rapid growth of revenue and profit.

Large-scale cost reduction continues to be interpreted, and profitability has improved markedly. 2023Q3 achieved a gross profit margin of 42.79%, with a year-on-year ratio of +4.8pcts and a month-on-month ratio of +1.9pcts. The significant increase in profitability was mainly due to the full utilization of the company's production capacity. At the same time, the equipment was fully adjusted from 4- and 6-line machines to industry-leading “20 line machines” through technical reform, further reducing costs and increasing efficiency at the technical level. The sales/management/R&D/finance expense ratio of 2023Q3 was -2.1/-1.5/-0.1/-0.5pcts year-on-year respectively. The expansion of sales scale effectively diluted the cost ratio, greatly improved profitability, and laid a solid foundation for the company to continue to increase R&D investment. In 23Q3, the company achieved a net profit margin of 26.1%, +7.4pcts over the same period last year. Large-scale cost reduction had a significant effect in boosting profitability.

High downstream prosperity supports the expansion of production capacity, and the product matrix is gradually being improved. According to CPIA statistics and forecasts, in 2022, the world added about 230 GW of photovoltaics, an increase of 35.3% over the previous year. The world's new PV installed capacity is expected to reach 305-350 GW in 2023, and the industry will maintain a high level of prosperity. After the price of silicon materials fell, the downstream operating rate increased, and production expansion plans were gradually implemented. The number of orders from major customers such as GCL Technology, Longji Co., Tongwei, Beijing Express, and Shangji Hongyuan continued to increase, and the company's production capacity was fully digested. According to the company's announcement, the average delivery reached 3 million kilometers in 23Q2, and there was still an increase over 23Q3. At the same time, the company's production expansion plan is progressing steadily. The 23Q1 company's production capacity is only 3 million kilometers/month, and now it has achieved a production capacity of nearly 6 million km/month. The subsequent expansion target is expected to be 10 million km/month, which is expected to fully absorb the dividends of the downstream boom. In terms of products, the company continues to promote product “thinning” while speeding up the pace of tungsten wire layout. Currently, the finest specification of the company's carbon steel wire diamond wire has reached 30 μm, and the finest size of tungsten wire has reached 27 μm. The company's product matrix has achieved full coverage of the 27μm-450μm range. The 20-wire machines that have expanded production are compatible with tungsten wire and carbon steel wire diamond wire.

“Integration of light, hydrogen, and storage” opens up room for growth, and the increase in executive holdings shows confidence in development. In terms of high-purity quartz sand, the company entered the industry through the acquisition of 70% of Lihui Xincai's shares. Lihui New Materials has successfully developed production equipment and technology for high-purity quartz sand, and the product quality has been recognized by large-scale and high-quality crucible manufacturers in the industry. Lihui New Materials already has mass production capacity for medium and outer sand, continuous industrial production capacity and a production capacity of 5,000 tons/year. The company plans to increase production capacity to 20,000 tons/year after the acquisition is completed. In terms of hydrogen energy, the company has a 35% stake in Yishang New Energy. Yishang New Energy's hydrogen energy key material products have now passed customer verification and have a foundation for industrialization. It is expected that rapid growth can be expected in the next 2-3 years, which is expected to create a new growth curve for the company. Recently, the company issued a series of announcements where the actual controllers promised not to reduce their holdings of the company's shares in any form within six months and some directors' and supervisors' plans to increase their holdings of the company's shares, demonstrating confidence in the company's future development prospects and high recognition of the company's value.

Risk factors: The company's tungsten wire R&D and production fell short of expectations; industry price competition intensified; raw material prices fluctuated greatly; the company's production capacity expansion fell short of expectations; and silicon wafer prices rose more than expected.

Investment suggestions: The expansion of the company's diamond wire production capacity drives rapid revenue and profit growth, while forming a scale effect to strengthen profitability, and the expansion of downstream demand effectively digests the company's production capacity, and the growth of the company's main business is highly certain.

The hydrogen energy & high-purity quartz sand business went from 0 to 1, creating a second growth curve to inject growth momentum into the company. Considering the oversupply in the short to medium term industry and the slowdown in downstream demand growth, combined with the three-quarter report, the company adjusted the company's 2023-24 net profit forecast to 256 million million/416 million yuan (original forecast was 341 million/472 million yuan), adding the 2025 net profit forecast to 497 million yuan, corresponding to the 2023-25 EPS forecast of 0.92/1.49/1.78 yuan.

The current price corresponds to 20/12/10 times PE. Referring to the comparable company Meichang Shares, High Test Shares, and Sanchao New Materials, Wind in 2024 unanimously predicted an average of 9x PE. Considering the company's active expansion of production capacity and imminent release, the 2024 performance is expected to maintain a high growth rate, giving the company 14x PE in 2024, corresponding to the target price of 21 yuan, maintaining a “buy” rating.