Incidents:

The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 1.012 billion yuan, a year-on-year decrease of 15.92%, a year-on-year decrease of 0.149 billion yuan, a year-on-year decrease of 25.71%, after deducting non-return net profit of 0.124 billion yuan, a year-on-year decrease of 36.69%. Among them, the third quarter of 2024 achieved revenue of 0.353 billion yuan, a year-on-year decrease of 15.52%, net profit to mother of 0.055 billion yuan, a year-on-year decrease of 34.49%, and net profit after deducting non-return to mother of 0.046 billion yuan, a year-on-year decrease of 44.85%.

Operation and profitability are under pressure in the short term, and we are optimistic that demand for heat pumps will pick up. On the revenue side, the company's revenue continued to decline during the reporting period, which is expected to be mainly due to the decline in the HVAC business, while the HVAC business experienced negative growth due to a high base of heat pump industry exports in the context of a high base+slowing progress in green energy plans in European countries. However, judging from recent high-frequency data, against the backdrop of a low base, the price of superimposed natural gas continues to rise, and European demand has steadily rebounded, driving China's heat pump exports to gradually improve. Therefore, we expect that with the completion of European storage removal and the acceleration of the pace of energy transformation by European governments, heat pumps and other products are expected to accelerate penetration. On the performance side, gross profit margin for the first three quarters of 2024 was 24.42%, down 0.98 pct year on year, down 14.71% year on year, down 2.42 pct year on year, gross profit margin of 27.76% year on year, up 1.39 pct year on year, net profit margin 15.64%, down 4.91 pct year on year. Profitability continues to be under pressure, mainly due to an increase in the share of new energy products with lower gross margins, leading to a decline in overall gross margin. At the same time, the company's cost side increased significantly. The sales/management/R&D expenses ratio for the first three quarters of 2024 was 1.72%/2.33%/8.46%, -0.03/+0.38/+3.65 year on year, leading to a 4pct increase in the cost ratio to 12.51%. We expect that it is mainly due to the company's increased investment in R&D in recent years to promote innovation and implementation of the company's related products.

Empowering industrial automation and robotics, the potential is limitless. During the reporting period, the company increased R&D investment in the field of automation, focusing on key industries and models, giving full play to the experience and advantages of R&D, developing servo products integrating customer customization, industry customization and drive control. Combining in-depth understanding of customer equipment processes, the company reduced costs and increased efficiency through design optimization, provided customers with high-quality solutions, and strived to become a strong growth point for the company in the future.

Profit forecast: Optimistic about the company's market position in heat pump controllers and other fields. It is expected that with the recovery of the heat pump industry, the company's main business is expected to gradually ease pressure. At the same time, with the launch of robot-related products, it is expected to benefit from the explosion of demand in various downstream fields in the future. We expect the company to achieve net profit of 2.00/ 2.97/ 0.359 billion yuan in 2024-2026, corresponding PE 27/ 18/15 times. The 2025 profit was estimated at 22 times PE, and the target price was 69.2 yuan, maintaining the “buy” rating.

Risk warning: Downstream demand falls short of expectations, profit forecasts and valuation judgments fall short of expectations.