Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 0.946 billion yuan, a year-on-year decrease of 6.39%, achieved net profit due to mother of 0.258 billion yuan, a year-on-year decrease of 16.80%, and realized net profit of 0.246 billion yuan before the previous year, a year-on-year decrease of 18.20%; in the third quarter of 2024, the company achieved operating income of 0.277 billion yuan, a year-on-year decrease of 8.04%; achieved net profit to mother 55.4201 Million yuan, a year-on-year decrease of 36.50%; net profit not attributable to mother was 51.5013 million yuan, a year-on-year decrease of 37.83%; slightly lower than market expectations.

2024Q3 revenue is under pressure, and gross margin continues to rise.

(1) Growth analysis: 2024Q3, the company's revenue fell 8.04% year on year, mainly due to the acquisition of Danish SGM, which slightly affected its main business operations. Net profit from 2024Q3 fell 36.50% year on year, and net profit without return to mother fell 37.83% year on year. The performance was weaker than the revenue growth rate, mainly because ① the company continued to explore the global market and sales and management expenses increased; ② the company continued to increase investment in R&D; R&D expenses increased 80.13% year over year; ③ exchange income due to exchange rate fluctuations decreased, and financial expenses increased 151.80% year on year.

(2) Profitability analysis: In the first three quarters of 2024, the company's gross sales margin was 51.74%, up 0.81 pct year on year, and gross margin continued to increase, mainly increasing the share of high-margin independent brands, driving overall gross margin growth; net sales margin was 27.57%, down 3.39 pct year on year; sales expense ratio, management expense ratio, and financial expense ratio were 8.58%, 7.14%, and -2.49%, respectively, up 1.05 pct, 1.36 pct, and 1.28 pct year on year, respectively.

(3) Analysis of operating capacity and operating cash flow: In the first three quarters of 2024, operating capacity was under short-term pressure. The company's accounts receivable turnover was 68.05 days, an increase of 19.05 days; the level of cash flow was also under pressure. The net cash flow from operating activities was 0.2 billion yuan, a year-on-year decrease of 34.73%.

(4) Continuously increase investment in R&D: As a “specialized, new, and small giant enterprise”, the company always adheres to the development strategy of independent innovation and continues to increase R&D investment. In the first three quarters of 2024, R&D investment was 59.8828 million yuan, an increase of 57.05%; the R&D cost rate was 6.33%, an increase of 2.56 pct; the company and its subsidiaries added more than 70 domestic and foreign authorized patents. As of June 30, 2024, projects such as core patented color rendering index control technology, color temperature adjustment technology, high-precision positioning technology, efficient heat dissipation and waterproofing technology, and IoT technology have all been developed and applied to product trial production or mass production. They have improved the product's control accuracy, waterproof performance, heat dissipation efficiency, and light color consistency, and successfully launched products such as ultra-high power LED stage light series and laser stage light series.

Overseas mergers and acquisitions have been launched, and I am optimistic about the rapid expansion of overseas brands.

(1) On August 31, the company signed an asset purchase agreement with the bankruptcy asset trustee designated by the Danish Aarhus Bankruptcy Court. The company or the designated entity of the company purchased the operating assets (including intangible assets such as brand names, trademarks, domain names, patents, merchant directory information, etc.), information technology equipment, vehicles, inventory, contractual rights, employees, etc.) owned by the Danish SGM Light A/S in bankruptcy proceedings, but did not bear SGM's debts. The purchase price was 3 million euros.

At the same time, the company plans to establish a wholly-owned subsidiary SGM Lighting A/P in Denmark to further improve the product brand matrix and help enhance the company's comprehensive market competitiveness.

(2) Established in 1975, SGM is a world-renowned architectural art lighting product and stage entertainment lighting company, with a sales network covering many countries and regions; it is the first in the industry to launch all-weather waterproof headlamp products and has unique patented technology; SGM products are widely used in many well-known architectural art lighting and stage entertainment projects, including the LV headquarters art lighting project in Paris, France, the Universal Studios Orlando lighting project, the United States, the Sky Tree Lighting Project in Singapore, the Rolling Stones Rolling Stone concert, World-renowned projects such as the Justin Bieber concert.

(3) The acquisition of SGM is in line with the company's global strategy and industrial layout, and forms a positive complementary effect with the company's existing business. It is conducive to enriching the company's product categories, enhancing the company's brand matrix, broadening brands and channels, and enhancing the company's comprehensive strength and market competitive advantage. The acquisition of SGM is also expected to rapidly increase the company's revenue and performance.

Maintain a “buy” rating. Considering the consolidation of acquisition projects and the slow rise in new product yield, we slightly lowered our profit forecast. We expect the company's net profit to be 0.367 billion yuan, 0.463 billion yuan, and 0.536 billion yuan respectively (the pre-forecast values for 2024-2026 were 0.425 billion yuan, 0.524 billion yuan, and 0.634 billion yuan, respectively). According to the stock price on October 29, 2024, PE is respectively 13.6, 10.8, 9.3 times. Benefiting from the continued growth of global performing arts market activity and responding to strong demand for performing arts equipment, the company is expected to continue to increase its market share in the future, maintaining a “buy” rating as a leading domestic stage lighting equipment leader.

Risk warning: risk of international trade friction; risk of exchange rate fluctuations; risk of external processing and production; risk of repeated overseas epidemics; risk of repeated overseas epidemics; risk of loss of core technology and management personnel; risk of bias in estimating the size of the industry market.