Incident Overview: The company released the 2024 third quarter report. The cumulative revenue of 2024Q1-3 was 1.47 billion yuan, -2.5% YoY; net profit to mother was 0.116 billion yuan, or -38.3% YoY. 2024Q3's revenue was 0.46 billion yuan, -17.5% YoY, -8.6% month-on-month; net profit to mother was 0.023 billion yuan, -62.4% YoY and -51.7%.

Volkswagen sales declined, and revenue and profits were under pressure. Revenue side: 2024Q3 revenue was 0.46 billion yuan, -17.5% YoY, -8.6% YoY, down YoY. 2024Q3 global Volkswagen sales volume was 2.176 million vehicles, -7.1% YoY, -3.0%; domestic SAIC-VW sales volume was 0.638 million units, -20.0% YoY, +3.1% month-on-month; Domestic Tesla Q3 sales volume was 0.249 million units, +12.0% YoY and +21.1% month-on-month. We expect the revenue decline to be mainly affected by the decline in mass revenue from major customers. Profit side: 2024Q3's gross profit margin was 23.9%, year-on-year -2.2 pct, month-on-month +0.05pct; net profit margin 4.9%, year-on-month -5.9pct, the company's 2024Q3 profit was under pressure. The year-on-year decline was mainly due to a decline in revenue, gross margin and impact (a decrease in export gross profit, an increase in the share of differential assembly affecting gross profit) and financial expenses; the month-on-month decline was mainly due to a decline in revenue and large other amounts such as 2024Q2 government subsidies and value-added tax input plus deductions (2024Q2 is 23 million yuan, 2024Q3 about 7 million yuan). Expense side: 2024Q3's sales, management, R&D, and finance rates were 1.0%, 6.9%, and 4.3%, respectively, +0.4pct, +1.0pct, +1.2pct, +1.8pct, month-on-month, and +0.1pct, -0.3pct, -0.8pct, and +1.9pct, respectively. The period fee ratio was 18.0%, +4.4pct, and +0.8pct month-on-month. The increase in financial expenses was mainly due to a decrease in exchange earnings and an increase in interest charges on convertible bonds during the reporting period.

The comprehensive expansion of the product category will reduce weight, and the main reduction gears are expected to be released. The company actively lays out the main reducer gears, motor shafts, and lightweight (steering joints, control arms). 0.5 million motor shafts were built in December 2023; the main reducer gears were built in December 2023; 0.7 million steering knucks+0.8 million control arms were built in December 2023, contributing to the increase in 2024. Along with the continuous expansion of the product line, the value of the company's bicycles increased dramatically, opening up room for medium- to long-term growth.

The construction of a factory in Thailand opens up space for medium- to long-term growth. In February 2023, the company announced that it plans to establish a wholly-owned subsidiary in Thailand and invest in the construction of new energy vehicle parts projects. The company will actively accelerate the construction and capacity layout of overseas production bases. It is expected that the Thai company will begin the first phase of production equipment installation and commissioning in the fourth quarter of this year, and will begin to establish production capacity in the first quarter of 2025. We believe that overseas construction can reduce the impact of fluctuations in export tariffs and shipping costs on the company's profits, and at the same time facilitate the company's acquisition of overseas orders and accelerate globalization.

Investment advice: The company is a precision drive system gear leader and is accelerating globalization. We are optimistic about the company's medium- to long-term growth and adjust profit forecasts. We expect revenue of 2.22/2.8/3.54 billion yuan for 2024-2026, net profit of 0.22/0.3/0.39 billion yuan respectively, and EPS 0.46/0.62/0.80 yuan respectively, corresponding to the closing price of 8.73 yuan/share on October 21, 2024. PE is 19/14/11 times, respectively, to maintain the “recommendation” ratings.

Risk warning: Passenger car sales, new business, and overseas factory construction progress fell short of expectations; raw material prices rose more than expected.