1-3Q24 results meet our expectations

The company announced 1-3Q24 results: revenue for the first three quarters of 2024 was 8.047 billion yuan, -8.10% year over year; net profit from 1-3Q24 was 1.598 billion yuan, up 2.21% year on year; net profit from was 0.51 billion yuan, up 2.21% year on year; 3Q single quarter net profit was 0.51 billion yuan, or -2.04% year over year; the company's third quarter and 1-3Q24 results were basically in line with our expectations.

Profitability remained stable: 1-3Q24's gross profit margin was 35.0%, compared to 1.5ppt; 3Q24's single quarter gross profit margin was 33.7%, year-on-year, 3.7 ppt, mainly benefiting from the increase in the company's share of overseas high-margin business. In terms of expenses, 3Q24's sales expense rate/management expense rate/R&D expense rate/financial expense ratio was 4.8%/4.0%/3.7%/2.9%, compared to 1.4ppt/1.0pp/0.4pp/1.9ppt. Among them, the increase in R&D expenses was mainly due to the company's continuous investment in R&D of key core components and new products, new technologies and new processes.

The company has plenty of orders in hand: at the end of 2023, the company's contract debt was 0.75 billion yuan, and the 1-3Q24 company's contract debt doubled, mainly due to an increase in advance payments from customers receiving new orders; in terms of operating cash flow, the company's 1-3Q24 net operating cash flow was 1.468 billion yuan, -0.779 billion yuan in the same period in '23, an increase of 288% over the previous year, mainly benefiting from the company's strict control of accounts receivable and large accounts receivable The maturing conversion of notes.

Development trends

Overseas business continues to expand: 1) North America: Electric driven fracturing equipment continues to break through, and the company is expected to fully benefit. According to the company's announcement, in July 2024, the company received a new order for electric fracturing equipment from an old North American customer, and is currently speeding up the construction of an R&D building at the Houston plant. We believe that most diesel drive equipment in North America has reached the end of its life cycle, and is expected to be updated and replaced at an accelerated pace in the next two years. The company's high-performance fracturing equipment is expected to receive continuous orders after being approved by North American customers. Considering the higher profit margin of electric driven fracturing equipment, we believe that the optimization of the company's product structure may be expected to boost the company's profit center. 2) Middle East: Received large orders and is expected to continue to break through. In September 2024, the company won the bid for the Bahrain National Petroleum Company gas project. The total amount of the contract including tax is about 2.2 billion yuan. All 27 compressor units in the project will be supplied by the company. This project is another oil and gas engineering project from a high-end Middle Eastern market national petroleum company that the company undertook after Kuwait Petroleum Corporation and the UAE National Petroleum Company. We believe that the company has a core advantage in the field of natural gas equipment manufacturing and is expected to achieve further breakthroughs in Middle East orders.

Profit forecasting and valuation

We keep the company's 2024 profit forecast and 2025 profit forecast unchanged; the current stock price corresponds to the 2024/2025 price-earnings ratio of 12.7 times/11.1 times. We kept our industry rating and target price of 38 yuan unchanged, corresponding to 14.4 times the price-earnings ratio of 2024 and 12.6 times the price-earnings ratio of 2025, with 12.8% upward space compared to the current stock price.

risks

The expansion of business in the North American market fell short of expectations; the capital expenditure of domestic oil and gas companies fell short of expectations.