Incident: The company released its report for the third quarter of 2024. In the first three quarters, the company achieved revenue of 1.704 billion yuan, a year-on-year decrease of 5.92%; net profit to mother was 0.219 billion yuan, a year-on-year decrease of 3.16%. Among them, Q3 achieved revenue of 0.577 billion yuan, a year-on-year decrease of 13.23%; realized net profit to mother of 0.082 billion yuan, a year-on-year decrease of 15.88%.

The only civilian explosion manufacturer in Jiangxi Province has benefited from the progress of the Gan-Guangdong Canal project: the Zhejiang-Gan-Guangdong Canal consists of the Gan-Yue Canal and the Zhejiang-Jiangxi Canal, accounting for about 60% of the length within Jiangxi. On October 9, 2024, the Jiangxi Public Resources Exchange Network announced the winning bid results for the “Jiangxi Provincial Transportation Department Ganyue Canal Project Pre-Feasibility Study and Procurement Project” to actively promote the commencement of construction of the project. The company is the only civilian explosion manufacturer in Jiangxi. It currently has an industrial explosives production capacity of 0.174 million tons. It has significant location and capacity advantages, and will benefit deeply from the progress of the Zhejiang, Jiangxi and Guangdong Grand Canal project.

The new military materials business achieved a number of major breakthroughs: in the first half of 2024, the new military materials business signed a new contract amount of nearly 0.1 billion yuan, and the subsidiary Xinyu Cathay Pacific added about 2,000 new orders for small solid rocket propellers; Aoke New Materials completed AK06's annual production and order tasks for AK17 and AK18 products ahead of schedule; and Tuohong New Materials 1H2024's revenue increased 35% year-on-year.

The construction of the energy-containing materials production line has progressed significantly, and the speed of commissioning has accelerated: on October 9, 2024, the company issued the “Voluntary Information Disclosure Notice on the Progress of the Wholly-owned Subsidiary Jiangxi Jiujiang Cathay Pacific New Materials Production Line Project”. The two production lines for the energy-containing materials project were simultaneously constructed and put into operation in batches. Line 001 is expected to be put into operation in June 2025, with an annual production capacity of 2,500 tons; line 003 is expected to be put into operation in mid-2026, with an annual production capacity of 500 tons to 1800 tons (flexible).

Investment advice: The company is the only civilian explosion manufacturer in Jiangxi Province, benefiting from the commencement of construction of the Ganyue Canal and the construction of energy-containing materials production lines. We expect the company to achieve operating income of 2.749/3.468/4.419 billion yuan in 2024-2026, and net profit to mother of 0.325/0.4/0.54 billion yuan, respectively. The corresponding PE is 23.90/19.41/14.37 times, respectively, maintaining the “increase” rating.

Risk warning: Project construction falls short of expectations; price fluctuations of raw materials; risk of majority shareholders' pledge; risk of shareholder reduction; risk of impairment of goodwill.