Investment advice

In view of Topstar's business structure transformation in the past two years, large performance fluctuations and impairment charges, we downgraded the company's rating to “neutral”. The reasons are as follows:

The company announced 2024 1-3Q results: revenue of 2.235 billion yuan, or -30.96% YoY; net profit to mother of 9.02 million yuan, -92.99% YoY. The company lost 26.78 million yuan in net profit to mother in the third quarter. Green Energy projects continued to shrink, and Green Energy's profitability continued to decline. The results for the third quarter of the single quarter fell far short of our expectations.

The 2024-2025 integrated business dragged down significantly. The company's green energy business revenue fell 42.5% in the first three quarters, and revenue from automated integrated applications fell 25.7%. The Green Energy business's gross margin for the first three quarters was only 3.85% (down 9.46ppt from the previous year) due to project implementation falling short of expectations. We believe that the two integrated businesses in the fourth quarter will still put pressure on profits.

Product-based businesses are growing steadily. 1) The operating revenue of 2024Q1-3's industrial robots/injection molding machines/CNC machine tools was 0.199/0.162/0.156 billion yuan, up 8.9%/9.2%/-24.1%, respectively. We believe that the decline in CNC machine tool revenue is mainly due to plant relocation factors, and actual orders have increased. 2) 2024q1-3's gross margin of industrial robots was +5.2ppt to 49.6% year on year; gross margin of CNC machine tools increased by 2.9ppt to 34% year on year; gross margin of injection molding machines fell 6.7ppt to 16.1% year on year. We believe this is mainly due to increased competition.

The reduction in the scale of revenue has led to a passive increase in expense rates, and asset impairment accruals have increased the burden of cleaning up the burden. 1-3q24's sales/management/R&D/finance expense ratios were +1.7/+2.4/+0.8/+0.5ppt to 7.2%/6.4%/3.8%/1.5%, respectively. Due to the drastic reduction in revenue from the Green Energy business, the expense ratio increased passively. The company calculated asset impairment reserves of about 58.8 million yuan in the first three quarters, an increase of 53.8% over the previous year. We believe that speeding up the processing of the historical burden of integrated projects may help to release future performance flexibly.

What is our biggest difference from the market? The market believes that the business performance of the company is mainly affected by strategic transformation and that there is a lot of pressure on its business performance. We believe that the market competition for the company's layout of various general products is relatively intense. Against the backdrop of relative pressure on market demand, the flexibility and sustainable profitability of the product business remains to be seen.

Potential catalyst: The contraction of green energy projects continues to put pressure on gross margins and credit impairment.

Profit forecasting and valuation

Considering the sharp decline in the company's green energy business revenue and gross margin, and the company's calculation processing impairment, we drastically lowered our 2024 profit forecast by 98.9% to 1 million yuan, and cut 2025 profit 24.6% to 0.107 billion yuan. The current stock price is 49.8x the 2025 P/E. We balanced the adjustment of profit forecasts and the recent increase in the valuation center of the automation sector to maintain the target price of 13 yuan. We switched the valuation to 2025, corresponding to the 2025 P/E of 52x (considering the companies' premium for robots and five-axis machine tools), with room for increase of 3.8%, and downgraded the rating to neutral.

risks

The company's project settlement speed exceeded expectations, and the payment progress exceeded expectations.