Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 2.89 billion yuan, +26.4% year on year, realized net profit of 0.22 billion yuan, +2.1% year on year, and achieved net profit of 0.2 billion yuan after deduction, and +3.5% year on year. Q3 sales gross profit margin of 26.9% in a single quarter, -3.7 pct year on year, +0.4 pct month on month; net profit margin 6.1%, -3.9 pct year on year, -1.8 pct month on month.

Comment:

Revenue growth has been steady, and the North American market has accumulated and underdeveloped. 24Q3 achieved revenue of 1.009 billion yuan, or +29.5% over the same period. We believe that the company's revenue growth rate exceeding expectations is mainly due to the development of new KA customers in the North American region and the entry of the wheel bearing category into the KA customer system and is expected to achieve sustainable growth. The company's channel sinking strategy paid off, and the proportion of direct distribution in the warehouse network with higher gross margin continued to increase. Demand performance was also strong in other regions, such as Europe and Africa. Looking ahead to 25 years, as US interest rate cuts bring improvements in global macro fundamentals, the South American region, another important market for the company, is expected to recover its vitality, helping the company's revenue grow further.

The impact of short-term expenses over 25 years is expected to weaken marginally, and performance is expected to be fully unleashed. Net profit for 24Q3 was 63.1 million yuan, -18.9% YoY. After deducting non-net profit of 72.89 million yuan, +13.8% YoY.

Overall, Q3's profit growth was slightly lower than our previous expectations, mainly affected by marginal cost increases: 1) the joint venture “Guansheng Dongchi” (the company accounts for 70% of the shares) added related expenses to build sales, R&D and other teams; 2) the impact of accrual of some early accounts receivable; 3) the additional equity incentive expenses this year. Meanwhile, Q3's investment loss of 25.52 million was mainly due to loss of raw material futures hedging derivatives. The investment income for the same period last year was 13.67 million. If the investment loss was 25.52 million, the net profit for the current quarter was 89.1 million, +14% over the same period. We expect revenue growth to be fully reflected on the performance side as the company's expenses stabilize over 25 years.

The second growth curve of solid-state batteries is expected to fully collaborate with the advantages of post-market warehousing networks, channels, and management.

The company and Dongchi New Energy jointly invested in the establishment of a joint venture “Guansheng Dongchi” to develop and sell solid-state batteries. The joint venture plans to produce 2.1 million cells and systems, which are expected to be mass-produced and gradually generated in 2026. The mass production line products are lithium iron phosphate semi-solid batteries, which are expected to target household energy storage, industrial and commercial energy storage, large-scale energy storage power plants, special vehicles, electric boats, etc., focusing on high safety+cost performance, and is expected to fully collaborate with the company's warehouse network, localized distribution team, channel control and after-sales quality control in Europe Advantageous experience in quality assurance and maintenance.

Profit forecast and investment rating: The expansion of the company's automotive aftermarket business exceeded expectations with major customers in markets such as Europe and the US. We raised our 2024 revenue forecast, and also lowered the 2024 net profit forecast appropriately. The net profit forecast for 2024 was 0.3, 0.4, and 0.47 billion yuan respectively, and the corresponding EPS was 1.70, 2.23, and 2.64 yuan, respectively. The corresponding PE was 11 times, 9 times and 7 times, respectively, maintaining the “buy” rating.

Risk factors: macroeconomic and exchange rate fluctuations, fluctuations in the shipping environment, post-market demand falling short of expectations, and falling short of expectations in the promotion and implementation of solid state battery investment projects.