Description of the event

The company released its three-quarter report. Revenue for the first three quarters was 2,011 billion yuan, -1.12%; net profit for the first three quarters was 266 million yuan, -8.59%; net profit after deducting non-return net profit was 243 million yuan, -8.46% year-on-year.

Looking at a single quarter, 23Q3 had revenue of 672 million yuan, -2.16%; net profit of the mother was 95 million yuan, -14.44%; net profit after deducting non-return net profit of 88 million yuan, -13.58% year-on-year.

Incident comments

The manufacturing industry has recovered weakly, and the overall performance of the company's operations has been resilient. The overall stabilization of the manufacturing boom in the third quarter showed a weak recovery. Against this background, the company's revenue growth rate declined slightly year-on-year in line with expectations. Thanks to the expansion of sectors such as special speed reducers and an increase in share, shipments are expected to increase slightly in the 3rd quarter. The slight decline in revenue growth is mainly due to price reduction factors caused by industry competition. At the current time, judging from macro data and meso data performance, indicators related to manufacturing capital expenditure have gradually picked up. After 4 months of recovery, the PMI in September reached 50.2%, returning to the expansion range, and fell back to 49.5% in October. The total profit of the manufacturing industry is estimated to have achieved double-digit year-on-year growth for the second month in a row. Furthermore, the growth rate of PPI and forklift sales continued to pick up in September, and I am optimistic that demand in the manufacturing industry will gradually recover.

Q3 Gross margin declined slightly month-on-month, and the decline in investment income and impairment affected the company's net interest rate performance. The company's gross margin for the first three quarters was basically the same year on year, and net profit margin fell 1.1 pct year on year, mainly due to the year-on-year decline in investment income and impairment charges. Overall, the cost side remained stable. Looking at a single quarter, the Q3 gross profit margin was 25.57%, a slight decrease from the same period last month. It is expected to be mainly affected by price cuts. The Q3 net profit margin was 13.97%, a slight decrease of 2.1 pct from the previous year, and an increase of 1.2 pct over the previous month. The slight decrease in net interest rate was mainly due to the increase in the expense ratio. The expense ratio for the 23Q3 period was 10.24%, up 1.32pct year on year. Among them, sales, management, R&D, and financial expenses were 2.84% (+0.18pct), 3.39% (y+0.05pct), 4.45% (y+0.95pct), and -0.45% (yoy +0.13pct), respectively. Overall, the company's profitability performance was relatively stable.

Special/high-end speed reducers continue to gain strength, and profitability is expected to continue to improve. With the completion of the relocation of the GNORD plant in the first half of the year, the company's high-end production capacity ushered in a continuous release. In addition to consolidating advantages in the lithium battery field, achieving business expansion in downstream industries such as Hong Kong Machinery, photovoltaics, pharmaceuticals, environmental protection, food, grain and oil, etc., smoothing out demand fluctuations in specific industries, and compounding the blossoming of construction machinery transmission, etc., company-specific and high-end speed reducers are expected to continue to contribute to increased performance. In terms of profitability, various factors such as product price reductions, scale effects, product structure, raw material prices, and cost reduction and efficiency improvements brought about by focusing on lean manufacturing will all affect the company's gross profit margin. Considering the subsequent recovery in manufacturing demand, the continued strength of the company's high-end products, and price stabilization, we are still optimistic that the company's profitability will gradually improve.

Maintain a “buy” rating. The effect of platformization is gradually reflected, and export+sales channels continue to empower the company's market expansion. Net profit of 4.1, 52, and 63 million dollars is expected to be achieved in 2023-2025, corresponding to PE of 28x, 22x, and 18x, respectively.

Risk warning

1. Risk that manufacturing industry repair falls short of expectations;

2. The risk that the development of special speed reducers and high-end speed reducers falls short of expectations.