Description of the event

Zaisheng Technology released its three-quarter report: In the first three quarters of 2024, revenue was 1.1 billion yuan, down 13% year on year, net profit was about 0.091 billion yuan, down 23% year on year, and after deducting non-net profit, fell 37% year on year. In the third quarter, revenue of 0.35 billion yuan was achieved, a year-on-year decrease of 22%, and attributable net profit of 0.015 billion yuan, a decrease of 59% year-on-year, and a decrease of 70% year-on-year after deducting non-net profit.

Incident comments

Endogenous income continues to grow. The company's revenue for the first three quarters was about 1.1 billion yuan, down 13% year on year. Revenue for the 3rd quarter was about 0.35 billion yuan, down 22% year on year, mainly due to the impact of Yuyuan Environmental not being included in the scope of the merger in November 2023. If the revenue contribution of Yuyuan Environment was deducted in the same period last year, the company's revenue for the first three quarters increased 16% year on year, and revenue for the 3rd quarter increased 9% year on year. By business, the company's revenue from high-efficiency and energy-efficient products increased 22% year on year; clean air series products fell 39% year on year in the first three quarters, mainly due to the fact that Yuyuan Environmental was no longer included in the scope of the merger. At the same time, the company's oil filter product revenue declined, but the company's filter material products maintained good growth this year. Among them, revenue from high-efficiency air filter materials increased 3% year on year, and PTFE membrane revenue increased 100% year on year. Looking forward to the future, with the completion of the company's 0.05 million tons of high-performance ultra-fine glass fiber cotton construction project and the “clean air filter material intelligent upgrading project”, the company's ultra-fine glass fiber cotton production capacity has reached 0.12 million tons, laying the production capacity base for subsequent scale growth.

Profitability in the third quarter was still under month-on-month pressure. The company's gross margin for the first three quarters was about 22.4%, down 2.4 percentage points year on year. The gross margin for the 3rd quarter was about 21.3%, down 4.6 percentage points year on year, down 3.0 percentage points from month to month. The year-on-year decline in gross margin was mainly due to changes in revenue structure and lower average product sales prices. It was also affected by various factors such as insufficient production capacity release for new production projects and rising energy costs. The rate for the first three quarters was about 15.8%, up 1.1 percentage points year on year. Among them, sales, management, R&D, and finance expenses changed by -0.4, +0.1, +0.8, and +0.6 percentage points year on year, respectively. The rate was mainly due to a decrease in revenue scale and an increase of overall cost amortization. The rate for the single 3 quarter period was about 19.0%, up 1.9 percentage points year on year, and 4.8 percentage points from month to month. At the same time, after Youyuan's announcement, credit impairment losses for the first three quarters of this year were offset back by about 2 million yuan, and depreciated about 8 million yuan in the same period last year. In the end, the company's net interest rate for the first three quarters was about 8.3%, down 1.0 percentage point year on year, mainly due to other income increasing by about 11 million yuan year on year, and net investment income increased by about 11 million yuan year on year, mainly contributing to the company's current holding of 30% of Youyuan Environmental's shares. However, in the third quarter, the company's net interest rate was about 4.3%, down 3.9 percentage points year on year and 6.4 percentage points month on month, mainly due to the decline in gross profit levels.

Returning to the main materials business, cash flow improved. In 2018-2022, Youyuan Environmental's revenue was 4.0, 4.9, 0.44, 0.4, and 0.43 billion yuan respectively. Revenue fluctuated along with demand for new construction of panels, pig houses, semiconductors, etc. Excluding the revenue from Yuyuan Environmental's purification equipment, the compounded revenue growth rate in 2018-2022 was about 15%. Compared with the equipment business, the materials business showed stronger growth and competitiveness. As the company returned to the main material business, competitiveness became more focused, and cash flow improved. The revenue ratio for the first three quarters was 0.86, compared to 0.75 in the same period last year. The net present ratio reached 1.59, compared to only 0.48 in the same period last year. The company's net profit is estimated to be around 0.13 or 0.17 billion yuan in 2024-2025, and the corresponding valuation is 26 or 19 times.

Risk warning

1. The pace of recovery in downstream demand is lower than expected;

2. The cost of raw materials or energy has risen sharply.