Incident Overview

The company's 2024Q3 revenue/net profit attributable to mother was 0.358/0.045/0.031 billion yuan respectively, up 40.64%/-12.48%/-1.63% year over year, mainly from government subsidies of 0.016 billion yuan (down 9% year on year). We analyzed that the decline in net profit to mother was mainly due to increased production capacity expansion, fixed asset depreciation and other related expenses. 24 In the first three quarters, the company's revenue/net profit deducted from mother and operating cash flow were 8.72/0.094/0.074/-0.001 billion yuan, up 25.34%/2.44%/-100.76% year-on-year. Operating cash flow was lower than net profit mainly due to increasing inventory reserves and Hengyue Security's annual output of 72 million dollars of functional safety gloves construction project, which led to the purchase of goods and acceptance of labor Increased cash payments for services.

Analytical judgment:

The production capacity of functional gloves has been expanded in an orderly manner, and the 4,800-ton ultra-high fiber project is expected to contribute to production capacity by the end of next year. According to the company's 24/10/28 investor exchange minutes, 1) The company's revenue growth contribution mainly comes from the security gloves sector. The increase in security glove production capacity drives an increase in sales orders, mainly based on two factors: first, the subsidiary Hengyue Security's “72 million annual output functional safety gloves project” production capacity was gradually released in the second quarter; second, the company's original production line transformation had an obvious effect of improving quality and efficiency. 2) In the ultra-high molecular weight polyethylene fiber sector, we judge that it is still mainly for personal use. The number of orders and production and sales of anti-cutting gloves with MetalQ engineering yarn as the core raw material, the company's self-developed product, has increased significantly; in the first three quarters, sales totaled 212 tons, with an average unit price of about 0.0861 million yuan, and the overall gross margin was basically flat from month to month.

Gross margin declined in Q3, and the decline in net profit margin in Q3 was lower than gross margin mainly due to a decrease in the period expense ratio. (1) The gross margin/net profit margin of the 2024Q3 company was 25.1%/12.6%/8.6%/8.6%, a year-on-year decrease of 9.8/7.6/3.7 PCT. We analyzed that the decline in gross margin was mainly due to the company continuing to promote the construction of convertible bond raising projects, continuous expansion of production capacity, and increase in fixed asset depreciation; 24Q3 sales/management/R&D/finance expense ratios were 2.24%/3.53%/5.67%/0.95%, respectively, a year-on-year decrease of 2.30/2.86/1.12/0.97PCT; the share of other income decreased by 4.58PCT, mainly due to a 9% decrease in government subsidies; the share of income tax expenses increased by 0.05 PCT. (2) The company's gross margin/net profit margin in the first three quarters of 2024 was 24.87%/10.79%, a year-on-year decrease of 1.90/2.62PCT; the sales/management/ R&D/finance expense ratios for the first three quarters were 2.88%/4.52%/4.80%/0.24%, respectively, down 0.30/0.48/0.22/ -0.12PCT; the share of other income decreased by 0.95PCT; the share of asset impairment losses increased by 0.44PCT, mainly due to increased inventory depreciation preparations; increased share of credit impairment losses 0.17 PCT; income tax/revenue decreased by 0.04 PCT year over year.

Orders increased, and in order to guarantee customer demand, the company took the initiative to increase inventory reserves. At the end of the 24Q3 period, the company's inventory was 0.432 billion yuan, up 56.32% year over year.

The number of inventory turnover days was 152 days, an increase of 22 days over the previous year. The company's accounts receivable were 0.281 billion yuan, up 52.77% year on year. The average number of accounts receivable turnover days was 78 days, an increase of 11 days year over year. The company's accounts payable was 0.317 billion yuan, an increase of 14.80% over the previous year. The average number of accounts payable turnover days was 128 days, an increase of 61 days over the previous year.

Investment advice

We analyzed, 1) The company's main glove business accelerated expansion, and production line Q2 of the “72 million annual production functional safety gloves project” in the Industrial Park began to be gradually put into operation in '24, and the company plans to digest it over a period of 3-5 years; in addition, Vietnam's production capacity is expected to be put into operation in Q3 next year, but it is also expected to increase quarterly depreciation; 2) UHMWPE is still mainly for personal use, considering the impact of depreciation. Foreign sales volume is not high, and the annual profit contribution is limited; the “12000 tons of ultra-high molecular weight polyethylene fiber project” is expected to contribute limited to annual profit; Construction officially started on September 25, and production capacity contributions are expected by the end of next year. 3) Actively promote the construction of biodegradable polyester rubber projects with an annual output of 0.11 million tons, which is expected to contribute new growth points in the long term. Considering the impact of depreciation of Vietnam's commencement of production next year and the impact of interest on convertible bonds starting in Q4 this year, etc., the company lowered its 2024-2026 operating income forecast by 1.37/1.828/2.386 billion yuan to 1.335/1.737/2.345 billion yuan, and the 2024-2026 net profit to mother of 0.196/0.263/0.32 billion yuan to 0.15/0.196/0.282 billion yuan; corresponding EPS reduction of 1.35/1.81 /2.20 yuan to 1.03/1.35/1.94 yuan. The closing price of 20.33 yuan on October 30, 2024 corresponds to a 24-26 PE of 20/15/11X, maintaining a “buy” rating.

Risk warning

Exchange rate fluctuation risk; raw material price fluctuation risk; trade friction risk; risk of production capacity absorption of fund-raising projects; risk of new material development and customer inspection falling short of expectations; systemic risk.