Performance review

3Q24 results fell short of our expectations

The company announced 3Q24 results: 1-3Q24 revenue of 9.336 billion yuan, +10.54% year on year, net profit to mother 0.649 billion yuan, +20.10% year on year, net profit of 0.629 billion yuan after deduction, +0.81% year on year. Corresponding to 3Q24, the company's revenue was 2.99 billion yuan, +4.09% YoY, net profit to mother 0.175 billion yuan, -17.18% YoY, and net profit before deducting 0.163 billion yuan, or -18.95% YoY.

The company's performance fell short of our expectations, mainly because the company calculated credit impairment based on historical issues.

Development trends

Cold distribution and auto zero continued to grow, and the equipment business dragged down revenue. The company's 3Q revenue was +4% YoY and decelerated compared to 2Q. We estimate that 3Q refrigeration parts business revenue still achieved double-digit year-on-year growth. According to industry online data, 2Q/3Q air conditioning production was +13%/+7% year-on-year. Production slowed in the context of 3Q inventory removal, but the company's growth was significantly better than that of the industry. We estimate that the year-on-year decline in refrigeration equipment revenue in 3Q dragged down overall revenue, mainly due to the impact of industry sentiment (industry online data July to August central air sales -5% year-on-year). We estimate that 3Q Auto Zero's revenue increased by a large double digit year on year. In August, the company completed the acquisition and merger of Shanghai Dachuang, and further strengthened the company's product line in waterside valves, etc.

Operating profitability remained stable, and historical estimates dragged down profits. 3Q's gross profit margin was 18.6% (-0.8ppt year over year). We estimate it was mainly affected by the cold mixing competition mechanism and the decline in revenue from high-margin equipment. The 3Q company's sales/management/R&D/finance rates remained flat year-on-year at -0.48/ -0.46/+0.92ppt/year over year. The company accrued credit impairment of 63.33 million yuan and included recurring profit and loss in 3Q, mainly due to the impact of the transfer price of the sales subsidiary of Dunan Energy Saving and the subsidiary's bad debt preparation for payment. The 3Q company's net interest rate to mother was 5.8% (-1.5ppt year on year), and the company's net interest rate to mother was 7.5% (-0.4ppt year on year) without taking into account impairment effects. The company announced that it accrued asset and credit impairment losses of 0.114 billion yuan from 1 to 3Q24, and reduced net profit to mother by 0.109 billion yuan. Excluding the effects of impairment, net profit not attributable to mother was +11% year-on-year from 1-3Q24.

The strategic goals are clear, and refrigeration and zero steam are developed on both sides. Since Gree joined the company, we believe that the company's strategic goals have continued to be clear and tactical actions have been implemented. The refrigeration business continues to grow steadily with the support of major shareholders, and continues to optimize the business structure to enhance profitability and expand overseas and commercial business. The expansion of production capacity and product line in the auto parts business accelerates, and we expect to achieve revenue of 0.75 billion yuan this year. Due to the recent domestic trade-in and overseas air conditioning boom, the air conditioner production schedule trend is good, and the company, as an upstream parts company, will also fully benefit. The upgrade of air conditioning products driven by national subsidies is also beneficial to the business adjustment of the company's valve structure.

Profit forecasting and valuation

We keep our 2024/2025 earnings forecast unchanged. The current stock price corresponds to 11.7 times/10.0 times 2024/2025 P/E. We maintain a target price of 16.28 yuan and an outperforming industry rating, corresponding to 17.1x/14.8 times 2024/2025 P/E, with 47.1% upside compared to the current stock price.

risks

The refrigeration business fluctuated; the auto parts business fell short of expectations; market expansion fell short of expectations.