Incident: Zaisheng Technology released the 2024 three-quarter report. In the first three quarters, Zaisheng Technology achieved revenue of 1.096 billion yuan, down 13.38% year on year, and achieved net profit of 90.88 million yuan, down 22.51% year on year. Among them, non-recurring profit and loss such as government subsidies was 26.34 million yuan, or 14.49 million yuan for the same period last year, after deducting net profit of 64.54 million yuan. Looking at a single quarter, Q3's revenue was 0.345 billion yuan, down 22.1% year on year, net profit to mother was 14.72 million yuan, down 59.11% year on year, and net profit after deducting 9.63 million yuan, down 69.56% year on year.

The scale of the main business has been growing since a long time has been excluded, with the energy efficiency sector contributing the most. The year-on-year decline in the company's revenue in the first three quarters was mainly due to the fact that the revenue caliber for the same period last year included Yuyuan Environment (Youyuan will no longer be included in the scope of consolidated statements since November 2023). After excluding Youyuan, the company's revenue for the first three quarters of this year increased 14.57% year on year, revenue for the third quarter of a single year increased 8.57% year on year, and the main business maintained a steady growth pace. By business, the company's revenue in the energy efficiency sector increased 21.71% year on year in the first three quarters, which was the main driving force for the company's total revenue growth, while the clean air sector decreased by 39.32% year on year, mainly affected by the decline in revenue from Youyuan Corporation and oil filtration products.

Profit margin indicators have declined. The company's gross profit margin for the third quarter was 21.32%, a decrease of 4.61 pct and 3.02 pct, respectively. The decline in gross margin for the current period was mainly affected by factors such as changes in sales structure (increase in revenue share in the high-efficiency energy-saving sector with relatively low gross margin), insufficient release of new production capacity, and rising natural gas costs.

In terms of cost ratio, the company's expense ratio for the Q3 period was 18.96%, up 1.94 pct and 4.85 pct, respectively, from the same period last month, and overall expenses increased. Corresponding to Q3, the net profit margin on sales was 5.36%, and the year-on-month decrease was 3.54 pct and 6.66 pct, respectively.

Cash flow continues to be excellent. The net operating cash flow of Q3 was 85.21 million yuan, up 1192.56% and 79.64%, respectively. The significant improvement in cash flow was, on the one hand, a decrease in cash purchased for goods and labor payments in the current period. The amount spent in Q3 was 0.225 billion yuan, a year-on-year decrease of 18.28%, a year-on-year decrease of 82.87%, a decrease of 1.05 pct over the previous year; on the other hand, there was an increase in maturing bill payments. As of the end of Q3, the company's net cash balance was over 0.2 billion, with abundant cash flow and excellent solvency.

Profit forecasting and investment suggestions: Zaisheng Technology relies on the scale, cost, technology and brand advantages of glass wool to continuously expand application scenarios around the two core functions of filtration and insulation. In terms of filtration, while maintaining the steady growth of filter materials in electronics and other fields, we are actively cultivating new scenarios for filtration and dust removal applications in high-end industries such as nuclear industry and new energy vehicles; in terms of insulation, we have promptly grasped the trend of energy-saving upgrades in home appliances, buildings, etc., and products such as glass wool, VIP, and core materials have achieved rapid development. The company's net profit for 2024-2026 is expected to be 0.11 billion, 0.13 billion, and 0.16 billion, respectively. The corresponding PE is 32X, 27X, and 22X, respectively, maintaining a “buy” rating.

Risk warning: Demand growth for emerging downstream applications falls short of expectations, risk of deterioration of the competitive landscape, and risk of large fluctuations in raw materials and energy prices.