Sainz released its three-quarter report: Q3 achieved revenue of 0.229 billion yuan (yoy +73.52%, qoq -9.15%) and net profit of 27.8994 million yuan (yoy +56.40%, qoq -22.38%). Q1-Q3 2024 achieved revenue of 0.585 billion yuan (yoy +46.14%), net profit of 0.143 billion yuan (yoy +164.03%), after deducting non-net profit of 80.6612 million yuan (yoy +78.16%). We believe that the year-on-year increase in the company's profit is mainly due to the increase and share of revenue from product sales and operation services with high gross margins. We are optimistic that the transformation of “incremental” businesses such as company solutions into “stock” businesses such as products and operation services will improve profitability, and that the subsidiary Zijin Pharmaceutical's revenue and profit will continue to grow, maintaining a “buy” rating.

High gross margin stock business revenue recognition drove a continuous increase in Q3 gross margin and improved cost control capabilities

The company's gross profit margin for the first three quarters of 24 years was 35.32%, +2.71pp year on year, net profit margin 25.19%, +10.66pp year on year. The 24Q3 gross profit margin was 32.56%, +1.46 pp year on year, net profit margin 12.78%, and -1.78pp year on year. The year-on-year increase in the company's Q3 gross margin was mainly due to the gradual transformation of the company's revenue-confirmed solution projects in 2023 into high-margin stock business revenue such as environmental pharmaceuticals and operation services in '24. The 24Q3 net interest rate decline was mainly due to the 23Q3 asset+credit impairment impacting the net interest rate of about 2.88 percentage points. The sales/management/ R&D/ finance expense ratios for the first three quarters of 2023 were 5.96%/7.02%/5.65%/0.30%, respectively, +0.05pp/ -1.03pp/ -0.64pp/+0.33pp. The total cost rate for the period was 18.93%, or -1.28pp. Among them, the total expenses for the 24Q3 period were 18.03%, -6.77pp, and the company's ability to control expenses increased.

I am optimistic about the increase in profitability and the volume of the copper extractant business due to the “increase in storage” of the company's business

The company's downstream customers are mainly non-ferrous and smelting customers. The content includes environmental treatment of sewage and sewage, including engineering (EPC), products (environmentally friendly pharmaceuticals+equipment), and operation services (some operating projects include pharmaceutical revenue). Among them, EPC is an incremental market business. Downstream customers are mostly smelters, as well as customers such as copper foil plants and mines. After revenue is confirmed for some EPC projects, customers will hand over subsequent pharmaceutical procurement and operation services to Sainz, forming a stock market business that occurs every year following the operation of the project. The “incremental transfer” business model is expected to drive the company's profits to continue to grow. The company merged with Zijin Pharmaceutical in February '24. The copper extractants it sells are mainly used for hydrometallurgy copper ore. 24H1 revenue/net profit was 60.92/15.09 million yuan, +11.55%/+91.29% over the same period last year. We are optimistic about the increase in profitability and the volume of the copper extractant business due to the “increase in storage” of the company's business.

Profit forecasting and valuation

We maintained the company's 2024-2026 net profit of 0.206/0.235/0.291 billion yuan, corresponding to PE16/14/11 times PE. Comparatively, the company's 25-year Wind unanimously expected PE to be 16 times, giving the company 16 times PE in 25 years, corresponding to a target price of 39.36 yuan (previous value of 34.56 yuan), maintaining a “buy” rating.

Risk warning: The marketing of new technology is unfavorable, accounts receivable balances are large, and customer concentration is high.