Matters:

On the evening of November 15, the company announced that it plans to use its own capital of 25 to 50 million yuan to buy back the company's shares at a price not exceeding 27.45 yuan/share for future equity incentives or conversion of convertible bonds. Based on the maximum repurchase price, the current repurchase amount accounts for about 0.68%-1.36% of the current total share capital.

Commentary:

A buyback shows confidence. This repurchase shows the company's confidence in the future's continued and stable development and recognition of the long-term value of the stock. If used to implement equity incentive plans in the future, it will also help improve the company's long-term incentive mechanism and benefit-sharing mechanism, enhance team cohesion and enterprise competitiveness, and promote the company's healthy and sustainable development.

The logic of reducing fees and increasing efficiency continues to be interpreted. In the reviews of the 2023 Interim Report and the First Quarter Report, we judge that the reduction in the cost rate will be one of the important reasons for the company to release profits. This view continues to be verified in the three quarterly reports.

The sales/management/R&D expense ratio of 23Q1-Q3 company was 23.59%, 6.18%, and 23.35%, respectively, compared with -4.71/+0.15/+0.17pct in the same period in 2022. The sharp decline in sales expenses is mainly due to the company's introduction of LTC system construction, optimization of existing marketing systems at all levels, building systematic marketing sales capabilities, improving the ability of major customer systems to sign orders, and continuously improving efficiency.

The policy is strongly promoted, and the laboratory analytical instrument business can be expected in the future. Since June 2023, the state's support for vocational education has increased markedly. It has successively issued the “Implementation Plan for the Integration and Empowerment of Vocational Education in Vocational Education (2023-2025)” and the “Notice on Key Tasks to Accelerate the Construction and Reform of the Modern Vocational Education System”. The above document emphasizes vigorously building training bases and building an integrated industry and education community for the high-end instrument industry. We believe that the instruments and equipment of vocational colleges and applied undergraduate schools are mainly used for teaching demonstrations and practical training (985/211 focuses on high-end scientific research), which is more in line with the current level of development of domestic instruments and equipment. Combined with policy support such as medium- to long-term loans, domestic instrument manufacturers can expect to benefit significantly from the instrument market expansion triggered by this policy.

Investment advice: Maintain a “strong push” rating and target price of 25.97 yuan for 2024. We expect the company's net profit from 2023 to 2025 to be 71 million yuan, 126 million yuan, and 171 million yuan respectively, corresponding to 40 times PE, 22 times and 16 times PE, respectively. Using a segmented valuation method, the company's business is divided into traditional environmental monitoring instruments and high-end scientific instruments. In the environmental monitoring instrument sector, we selected the company's main competitors, Juguang Technology, Xuedilon, and Hexin Instruments, as comparable companies, and gave the 2024 target PE 22 times; in the high-end scientific instruments sector, we selected Dingyang Technology and Puyuan Jingdian as comparable companies, giving them a target of 30 times PE for 2024. Assuming that each sector accounts for the same share of net profit as gross profit, the company is given a target price of 25.97 yuan for 2024.

Risk warning: domestic substitution falls short of expectations, R&D failure, industrialization failure, industry competition intensifies, policy progress falls short of expectations, heavy reliance on government subsidies and tax incentives