Q3 Export sales and automotive leather are growing at an impressive rate. Wait for domestic demand orders to improve, and maintain a “buy” rating

2024Q3's revenue was 0.752 billion yuan (+1.07%), net profit to mother 0.053 billion yuan (-34.86%), 2024Q1-Q3 revenue 2.014 billion yuan (+3.8%), and net profit to mother 0.109 billion yuan (-37%). Considering the impact of weak domestic demand orders on the main business revenue and profit, we lowered our profit forecast. The net profit for 2024-2026 is 0.16/0.26/0.3 billion yuan (originally 0.224/0.276/0.332 billion yuan). The current stock price corresponds to PE 16.3/10.4/8.8 times. We are optimistic about the improvement in domestic demand in the main industry and the rapid development of international customer development & rapid development of automotive interiors & the improvement of Baotai's two-layer leather demand and profit improvement, maintaining the “buy” rating.

Both the volume and profit of the main business are under pressure due to weak domestic demand. Continued expansion of export sales is being promoted, and the share of export sales continues to rise

We expect revenue of 0.355 billion yuan (-7.8%) in 2024Q3, a decline in sales volume for downstream customers due to weak consumption, a gross profit margin of 18.14% (-2.6 pct) and net profit of 11 million (-75%). The decline in net profit is mainly due to a decrease in gross margin, an increase in financial expenses, and the impact of asset impairment losses due to falling sales and pressure on shipping prices due to market clearance. Q3 increased export sales expansion and continued to promote cooperation with Adidas. Overseas brand revenue contributed 71.21 million yuan, an increase of more than 90% over the previous year. Export sales accounted for 20% + of revenue, and 2024Q1-Q3 contributed more than 0.1 billion yuan to overseas brand revenue. The share of export sales is expected to increase further after the Indonesian plant is officially put into operation in 2025.

Hongxing Auto's leather scale and profitability both increased, and Baotai's revenue growth was in line with expectations and profits were under pressure

(1) Hongxing: Revenue is expected to be 0.221 billion yuan (+31.26%) in 2024Q3, mainly due to Q3 entering the peak season and a marked increase in sales of designated models, net profit of 41.87 million (+41.85%). Gross margin remains at a high level, and profitability is better than expected mainly due to reduced costs, customer structure, and internal management optimization. The promotion of cooperation between new car companies and new models is expected to increase in 2025. (2) Baotai: Demand for two-layer leather is increasing due to changes in terminal product styles, and demand for collagen raw materials is expected. The 2024Q3 revenue is expected to be 0.155 billion yuan (+12%), net profit 3.6208 million yuan (-73.76%), and the gross profit margin is 9.07% (-6.43pct).

Net profit margin decreased by 3.9 pct due to lower 2024Q3 gross margin and impairment losses, and cash flow improved year-on-year

(1) Profitability: 2024Q3 gross margin was 22.8% (-0.9pct), with a period expense ratio of 7.0% (+0.1pct), with sales/management/R&D/finance expense ratios of +0.1/+0.7/-0.08/-0.6pct, respectively, and a net profit margin of 7.0% (-3.9 pct). Other income accounts for 0.2% of revenue (-1.0pct), mainly due to a reduction of about 8 million yuan in government subsidies, asset impairment and credit impairment losses due to increased impairment charges as a share of -2.7 pct of revenue; (2) On the operating side:

The net operating cash flow of 2024Q1-Q3 was $0.17 billion (2023Q1-Q3 was 5.56 million yuan). As of 2024Q3, the inventory size was 1.279 billion yuan (+5.06%), and the inventory turnover period was 215 days (+17 days).

Risk warning: New customers, new category expansion, and profitability improvements fall short of expectations.