Incidents. Xianheng International announced its third-quarter results. In the first three quarters of 2024, it achieved revenue/net profit after deduction of 1.989/0.097/0.092 billion yuan, an increase of 18.82%/58.81%/30.37% year on year; 24Q3 achieved revenue/net profit to mother/ net profit after deducted from mother 0.805/0.054/0.051 billion yuan, an increase of 19.64%/101.44%/89.98% year on year.

Consolidate the leading position in the power grid sector, and cover revenue in the new sector and re-enter a rapid growth range. In 2024Q3, the company's revenue was 0.805 billion yuan, up 19.64% from the same period. Companies in the power grid sector cooperated with the upgrading and construction of the Internet of Things. Companies in the emerging field quickly entered the power generation industry, achieved coverage of the three major power generation groups, and achieved steady revenue growth.

The expansion of new industries has entered a “harvest period”, and cost control has greatly increased the level of profit. Net profit attributable to mother in 24Q3/net profit after deduction was 0.054/0.051 billion yuan, up 101.4%/89.98% year over year. 2024Q3's gross margin/net margin was 27.31%/6.98%, an increase of 1.91/3.01 pct over the previous year; after the company proposed the “Four Legions” slogan in 2023, the overall profit level was initially dragged down by an increase in the share of standard products with low gross profit. After a year and a half of developing new industries and a gradual “harvest period”, along with the increase in the share of non-standard products in the sales structure, we expect a steady increase in profit. The 24Q3 sales/management/finance/R&D expense ratio was 8.90%/7.33%/-0.05%/1.50%. The year-on-year change was -2.20/+0.95/+0.11/-0.06pct. The upfront sales expenses of the new industry are ahead. Currently, it has gradually matured, and the cost rate has declined. The net cash flow from 24Q3 operating activities was 0.058 billion yuan, an increase of 76.94% over the same period. We believe this was mainly due to the increase in current revenue.

Investment advice: The company continues to be deeply involved in the power grid field, expand horizontally and adopt the “Four Legions” strategy. At the same time, taking advantage of online procurement by central enterprises, we expect a steady increase in revenue. In the future, as the company deepens its understanding of new fields of expansion, the proportion of non-standard products will drive an increase in gross margin. As the leading MRO supplier in the State Grid field, the company has fully benefited from China Southern Power Grid's Dianhong IoT operating system upgrade project. China Southern Power Grid expects the industrial chain to expand to more than 900 sub-devices by the end of 2024, achieving full coverage of 1.35 million IoT terminals in the transmission and transformation field.

By the end of 2025, the coverage of terminals can exceed 100 million. In the future, the Dianhong IoT industry chain will be fully upgraded, and there is huge room for development. In addition, the company also has extensive experience in the field of low-altitude economy. Drones are used in various fields such as inspection and emergency response, and the annual revenue from technical services can reach 100 million. The net profit for 24-26 is estimated to be 0.23/0.3/0.37 billion yuan, respectively. The corresponding PE is 26X/20X/16X, maintaining the “recommended” rating.

Risk warning: The increase in online penetration falls short of expectations; the risk of government procurement spending being reduced.