The product sales structure was adjusted, and the Q3 company's performance was under pressure. In the first three quarters of 2023, the company achieved revenue of 3,088 billion yuan, -5.47%; net profit of 583 million yuan, -32.13%; net profit of net income of 512 million yuan, minus net profit of 512 million yuan, -35.12% year-on-year. Q323 achieved revenue of 976 million yuan, -17.45% year-on-year; net profit of 161 million yuan, -47.24%; net profit after deduction of 140 million yuan, -49.77% year-on-year, mainly due to adjustments in the company's product sales structure during the reporting period, and a decrease in gross profit from current product sales compared to the same period.

There is still room for optimization of the cost ratio, and investment in R&D will continue to be increased to ensure long-term competitiveness. The company's gross margin for the first three quarters was 33.20%, -7.31pct compared to -7.31pct, an overall decrease. The cost rate for the first three quarters (including R&D) was +1.79pct to 11.96% yoy, of which the sales/management/finance expense ratio was 0.58%/3.64%/1.00%, and +0.02pct/ -0.13pct/ +0.47pct year over year.

1-3Q23 R&D expenses were 208 million yuan, +20.10% year-on-year, and the R&D expense rate was +1.43 pct to 6.74% year-on-year, mainly due to the company's planned R&D activities during the reporting period. On this basis, the company's net profit margin for the first three quarters was 19.75%, -6.97pct year-on-year.

Lay out the future and actively increase inventory production to open up room for growth. The company is currently the only enterprise in China that has commercialized production of superconducting wires, and the only enterprise in the world that produces niobium-titanium ingots, bars, superconducting wires and manufacturing superconducting magnets. It is also one of the key R&D and production enterprises for high-performance high-temperature alloy materials in China. As of the end of Q3 in 2023, prepayments were $68 million, up 99.90% from the end of the previous year; inventory was $3.106 billion, +30.50% over the end of the previous year; and accounts receivable were $2,466 million, +88.52% over the end of the previous year. In November 2021, the company raised a fixed increase of 2,013 billion yuan. The capital raised is mainly used for projects such as the industrialization of high-performance metal materials for aerospace and high-performance superconducting wires. After the expansion is implemented, it will add 5050 tons of titanium alloy materials, 1500 tons of high-temperature alloy materials, and 1,250 tons of superconducting wire for MRI, opening up the bottleneck in the company's production capacity. We expect that the projects under construction will further increase revenue scale after delivery.

[Investment advice]

Based on the company's technical barriers in the fields of high-end titanium alloys and superconducting products and the implementation of fund-raising and expansion projects, we maintain our profit forecast. It is estimated that the company's 2023/2024/2025 revenue will be 50.61/60.88/7.947 billion yuan, respectively, and the company's net profit from 2023/2024/2025 will be 11.69/13.65/1,727 billion yuan, corresponding to EPS of 1.80/2.10/2.66 yuan, respectively. The corresponding PE is 27/23/18 times (11 in 2023) (Stock price on January 9th), maintaining the “increase in holdings” rating.

[Risk Reminder]

Downstream demand fell short of expectations;

The pace of production capacity release fell short of expectations;

Increased competition affects overall profitability.