Incident: On October 29, the company released its 2024 three-quarter report. From 1 to 3Q24, revenue was 2.482 billion yuan, YOY -11.2%; net profit to mother was 0.247 billion yuan, YOY -41.7%; deducted non-net profit of 0.234 billion yuan, YOY -36.3%. The performance was basically in line with market expectations. Affected by fluctuations in demand for downstream terminals, the company's performance in the first three quarters was under pressure. Our comprehensive review is as follows:

3Q24 revenue increased 3% year over year; profitability declined. 1) In terms of a single quarter, the company achieved revenue of 0.837 billion yuan, YOY +2.8%; net profit to mother of 0.082 billion yuan, YOY -34.6%; after deducting non-net profit of 0.076 billion yuan, YOY -17.7%. 2) Profit margin perspective: The company's gross margin fell 4.9ppt to 20.6% year on year; net margin fell 5.2ppt to 10.0% year on year. Among them, 3Q24 gross margin fell 3.7ppt to 18.8% year on year; net margin fell 5.6ppt to 9.8% year on year. Profitability has fluctuated.

The expense ratio for the period was basically the same year on year; net operating cash flow was positive year over year. From 1 to 3Q24, the company's expense ratio increased by 0.4 ppt to 8.3% year on year: 1) the sales expense ratio increased 0.05ppt to 1.7% year over year; 2) the management expense ratio increased 0.1 ppt to 2.1% year over year; 3) the financial expense ratio was -0.7%, compared to -0.2% in the same period last year; 4) the R&D expense ratio increased 0.7 ppt to 5.2 percent year over year. By the end of 3Q24, the company: 1) accounts receivable and notes were $1.783 billion, up 1.4% from the end of 2Q24; 2) prepayments of $0.131 billion, up 24.7% from the end of 2Q24; 3) inventory of $1.029 billion, up 2.7% from the end of 2Q24; 4) contract liabilities were $0.054 billion, up 39.1% from the end of 2Q24. From 1 to 3Q24, company: 1) Net cash flow from operating activities was 0.401 billion yuan, or -0.007 billion yuan in the same period last year, mainly due to collection of commercial notes receivable at the beginning of the year; 2) Net cash flow from investment activities was -0.672 billion yuan, 0.248 billion yuan in the same period last year, mainly due to an increase in fixed asset investment and a year-on-year decrease in cash recovered from current financial management due.

Implement a global strategy; change the ability of fund-raising projects to build large-size forgings. 1) Overseas expansion: The company continues to deepen cooperation with internationally renowned engine companies such as GE, Rollo, and Safran, and has signed long-term cooperation agreements, and overseas business is developing rapidly. From 2020 to 2023, overseas revenue grew rapidly from 0.063 billion yuan to 0.49 billion yuan, CAGR = 98.4%. 2) Project construction: In October 2024, the company comprehensively considered costs and requirements, announced changes to the IPO “Intelligent Production Line Construction Project for Aerospace Special Alloy Structural Parts” and plans to add a “large-scale special alloy forging intelligent production line construction project for high-end equipment”. The production year will produce a production scale of 0.0275 million tons of large-scale special alloy forgings for various types of high-end equipment, used in deep-sea equipment, nuclear power equipment, wind power equipment, and high-end aerospace equipment.

Investment proposal: The company is one of the few domestic private enterprises that can provide supporting special alloy precision annular forging products for high-end equipment such as aero engines, space launch vehicles, satellites, and gas turbines. With the promotion of fund-raising projects and the release of production capacity, it is expected that it will continue to benefit from the boom in various fields of aerospace and new energy. Taking into account fluctuations in downstream demand and adjusting the profit forecast, we expect the company's net profit to be 0.376 billion yuan, 0.534 billion yuan, and 654 million yuan respectively from 2024 to 2026, and the corresponding PE is 18x/13x/11x, respectively. We maintain the “Recommended” rating, taking into account the multi-dimensional improvement of the company's ability to develop overseas business.

Risk warning: downstream demand falls short of expectations; fund-raising projects fall short of expectations; product price reduction, etc.