Incident: On October 30, the company released its 2024 three-quarter report. From 1 to 3Q24, revenue was 0.777 billion yuan, YOY +6.9%; net profit to mother was 0.139 billion yuan, YOY +13.4%; after deducting non-net profit of 0.119 billion yuan, YOY +9.8%. The performance was in line with market expectations. The company's performance grew steadily in the first three quarters, and profitability improved. Our comprehensive review is as follows:

Net profit from 3Q24 increased 16% year over year; profitability increased from 1 to 3Q24. 1) In terms of a single quarter, the company achieved revenue of 0.275 billion yuan, YOY +9.2%; net profit to mother of 0.041 billion yuan, YOY +15.5%; after deducting non-net profit of 0.034 billion yuan, YOY +6.7%. 2) Profit margin perspective: The company's gross margin from 1 to 3q24 increased by 2.9 ppt to 76.9% year on year; net margin increased 0.2 ppt to 17.3% year on year, the highest level in the same period since 2020. Among them, 3Q24 gross margin increased 6.3ppt to 76.9% year over year; net margin decreased by 0.7ppt to 14.1% year over year.

Increase investment in R&D; pharmaceutical production bases/precision casting projects are progressing steadily. From 1 to 3Q24, the company's expense ratio increased 5.5 ppt to 56.9% year on year: 1) sales expense ratio decreased by 0.7 ppt to 25.5% year over year; 2) management expense ratio decreased by 1.9ppt to 13.5% year over year; 3) financial expenses ratio was 3.5%, compared to 2.1% in the same period last year; 4) R&D expenses increased 6.6ppt to 14.4% year over year; R&D expenses increased 99.0% to 0.112 billion yuan year over year, mainly due to increased R&D investment by subsidiaries. As of the end of 3Q24, the company: 1) accounts receivable and notes were $0.391 billion, down 2.8% from the end of 2Q24; 2) prepayments of $0.008 billion, up 38.8% from the end of 2Q24; 3) inventory of 0.328 billion yuan, up 7.8% from the end of 2Q24; 4) $0.958 billion in construction, an increase of 27.7% over the end of 2Q24, mainly due to continued investment in two production bases and superalloy precision casting projects in the pharmaceutical sector. From 1 to 3Q24, the company's net cash flow from operating activities was 0.051 billion yuan, compared to -0.02 billion yuan in the same period last year, which was a year-on-year correction.

Promote the construction of two bases in North and South; superalloys continue to benefit from the “two aircraft” boom. 1) Historical performance:

From 2020 to 2023, the company's revenue increased year by year from 0.553 billion yuan to 0.981 billion yuan, CAGR = 21.10%; net profit to mother increased year by year from 0.077 billion yuan to 0.177 billion yuan, CAGR = 32.02%. While the scale developed rapidly, profitability increased rapidly, and the net interest rate increased from 12.46% in 2020 to 19.24% in 2023. 2) Pharmaceutical manufacturing: From 2020 to 2023, revenue increased from 0.516 billion yuan to 0.701 billion yuan, CAGR = 10.70%. The company uses the “BD+ Research Institute” model to strengthen the construction and upgrading of R&D capabilities and accelerate the construction of two bases in North and South. 3) Superalloy: From 2020 to 2023, revenue grew rapidly from 0.036 billion yuan to 0.258 billion yuan, CAGR = 93.56%. The company benefits from the industrialization of domestic commercial aero engines, the industrialization of gas turbines, and the rapid growth in demand for localization.

Investment advice: The company is a leading pharmaceutical microecological bacteria leader in China. It has accumulated a strong presence in the field of superalloys and products. It has been honed and grown into a core supplier of “two-engine” hot-end components in ten years. Production and research capabilities for master alloys, cast blades, and powder turbines are scarce. We expect the company to achieve net profit of 0.21 billion yuan, 0.29 billion yuan, and 0.36 billion yuan from 2024 to 2026, respectively, and the corresponding PE is 28x/21x/16x, respectively. Maintain a “Recommended” rating.

Risk warning: downstream demand falls short of expectations; mass production progress of models under development falls short of expectations; product price reduction, etc.