Key points of investment:

Incident: The company released its 2024 three-quarter report, in line with expectations. The company's revenue for the first three quarters of 2024 was 0.812 billion, up 38.2% year on year; gross profit margin was 47.69%, down 2.17 pct year on year; net profit to mother - -51.89 million, compared to 79.12 million in the same period last year; net profit after deducting non-return to mother - -0.125 billion, or 18.75 million for the same period last year. Corresponding to quarterly revenue of 0.349 billion in the third quarter of 2024, up 56.8% year on year and 52.7% month on month; net profit to mother was 16.13 million, down 51.4% year on year.

The scale of new orders continues to grow, and verification of new equipment is progressing smoothly. As of the end of September, Zhongke Fei's inventory size was 1.55 billion, up 0.18 billion from the end of June, and 0.698 billion yuan in contract debt, up 0.07 billion from the end of June, reflecting an increase in advance payments due to the increase in the number of new orders signed by the company. It is expected that under the domestic substitution trend, the company will continue to expand its new orders in the future, gradually expanding the high-end product line layout.

Gross margin clearly rebounded month-on-month, and net profit in a single quarter corrected month-on-month. The company maintained high technology barriers. In 3Q24, Zhongke Fei's gross margin was 49.6%, up 11.7 pcts month-on-month from 2Q24, driving 3Q24's net profit level to 16.13 million, which changed from negative to positive compared to 2Q24.

R&D investment remained high, and the R&D cost rate declined somewhat from month to month. 9M24 Zhongke Flying Test's R&D expenses reached 0.335 billion yuan, up 131.8% year on year. The R&D cost rate was 41.2%, up 16.7 pcts year on year. The company's number of R&D personnel, R&D material costs, and share payment expenses all increased significantly. The company's R&D expenses peaked in 2Q this year. In 2Q24, R&D expenses in a single quarter reached 0.134 billion yuan, corresponding to a R&D expenditure rate of 58.6%; in 3Q24, the company's R&D expenses fell slightly to 0.128 billion yuan month-on-month. At the same time, combined with rapid revenue growth, the R&D expenses rate fell 21.9 pcts to 36.7% in a single quarter.

There is great potential to increase the localization rate of testing and measurement equipment, and there is an urgent need for autonomy and control. Currently, the overall revenue scale of domestic inspection and measurement equipment manufacturers is small, and there is still a gap between the technical level and overseas giants. Along with the shrinking of manufacturing processes, the US KLA accounts for most of the global inspection and measurement equipment market share. Testing and measurement equipment is related to the safety of the domestic fab industry chain. If the level of Zhongke Flying Measurement technology accelerates, it will lead to significant growth in performance.

Investment analysis opinion: Lower the profit forecast and maintain the “gain” rating. Considering that the company's R&D investment continues to increase, and the company's profit forecast is lowered, the company's net profit from 2024 to 2026 is expected to be 0.143, 0.21, and 0.332 billion (the original forecast was 0.171, 0.238, and 0.333 billion), respectively, with year-on-year growth rates of 1.9%, 46.6%, and 58.5%, respectively, with corresponding dynamic price-earnings ratios of 153, 105, and 66 times, respectively. It is expected that under the trend of autonomous control in the industrial chain, Zhongke Fei Test will maintain a trend of rapidly increasing market share, while product categories will continue to increase due to continuous breakthroughs in technology research and development. It is expected that the company's future performance will continue to grow and have great potential under the long-term trend. The increase in short-term R&D investment will not affect long-term growth, and it will still maintain a “gain” rating.

Risk warning: Lower demand affects the pace of production expansion in fabs; equipment verification results fall short of expectations; risk of lengthening raw material procurement cycles.