Incident: On October 24, 2024, the company released the “Third Quarter Report 2024”. In the first three quarters of 2024, the company achieved operating income of 0.777 billion yuan, +3.56% year on year, net profit to mother of 50.719 million yuan, -11.09% year on year, after deducting non-net profit of 49.341 million yuan, or -2.01% year on year. Cash flow from operating activities was $77.5995 million, +192.08% YoY.

Profitability is under short-term pressure, and cost-side control is good. Looking at 24Q3 alone, the company achieved operating income of 0.265 billion yuan, +4.95%/-2.39% month-on-month, net profit to mother of 15.2661 million yuan, -29.80% /month-on-month -23.90%, after deducting non-net profit of 14.774 million yuan, or -25.67% YoY. In terms of profit margin, 3Q2024's gross sales margin was 17.50%, -2.41 pct year on year, -1.09% month on month, and net sales margin was 5.76%, -2.86 pct year on year, and -1.63 pct month on month. On the cost side, the company's sales/management/R&D/finance expense ratios for the first three quarters of 2024 were 0.41%/4.38%/5.60%/0.48%, respectively, -0.17/+0.04/-0.06/+0.75pct, respectively. The cost side control was relatively good.

The ceramic ball project is progressing smoothly, and the 800V tram platform brings new opportunities. The 800V platform has gradually become the mainstream solution for electric vehicles, putting higher demands on the high speed, corrosion resistance, and insulation of motors.

Ceramic bearings may become the best choice to solve electric corrosion of bearings, and ceramic balls have great potential as their core material to replace traditional bearing steels. In 2023, the company steadily promoted the mass production process of ceramic rolling elements. It has built 2 G3 grade ceramic ball intelligent R&D production lines and 33 G5 industrial production lines (75 planned). In the future, ceramic balls will become the company's core product, which is expected to lead the replacement of domestic products.

More than 30 years of manufacturing experience have been accumulated, and a strong alliance with the Chinese Academy of Sciences. The company's bearing steel ball sales revenue has been ranked first in China for many years. Currently, it is the only domestic enterprise in China that has entered the procurement system of the top eight international bearing manufacturers. In June 2024, the company signed a strategic cooperation agreement with the Institute of Metals of the Chinese Academy of Sciences to jointly promote the localized preparation and high-precision processing of ceramic balls, provide high-quality products for high-end equipment industries such as high-end machine tools/new energy vehicles/industrial screws/humanoid robots/electrical/wind power, and strongly promote autonomous and controllable manufacturing of major equipment in China to ensure the safety and control of related industrial chains. The company continues to actively promote emerging businesses and open up space for the company's long-term growth.

Investment advice: The company is a leader in the domestic rolling element industry. It is actively increasing high-end categories such as ceramic rolling elements. There is huge room for localization and replacement, combined with the recovery in the boom in industries such as high-speed rail/wind power, and room for imagination in the field of humanoid robots, the company's performance is expected to grow steadily. The company is expected to achieve net profit of 0.084/0.125/0.172 billion yuan in 2024-2026, corresponding PE of 36.3/24.4/17.8 times, maintaining an “increase in holdings” rating.

Risk warning: risk of new product development falling short of expectations, risk of changes in trade policy, risk of foreign investment, etc.