Incident: Punai Co., Ltd. released its 2024 three-quarter report. The company achieved revenue of 4.003 billion yuan in the first three quarters, a slight decrease of 1.19% year on year. Net profit to mother was 0.123 billion yuan, down 40.81% year on year, and net profit not returned to mother after deducting 77.07 million yuan, down 60.32% year on year. Looking at a single quarter, Q3's revenue was 1.305 billion yuan, down 8.11% year on year. The loss for the quarter was 10.27 million yuan, compared to +62.65 million yuan in the same period last year, excluding loss of 20.69 million yuan after non-recurring profit and loss, compared to +59.64 million yuan for the same period last year.

The main domestic business experienced a sharp drop in volume and price, and overseas growth partially hedged the domestic decline. Q3 The company's revenue declined by 8.11% and 6.72%, respectively, and experienced quarterly losses for the first time since 2022. Its performance was mainly dragged down by the downstream steel industry. Production in the domestic steel industry fell by 8.5% in Q3. Since refractory materials for steelmaking are consumables (1 ton of crude steel requires about 15 kg of refractory), the total sales settlement volume of Q3 companies declined; at the same time, steel companies made corresponding price reduction requirements for upstream after deteriorating efficiency, which led to a significant drop in refractory settlement prices this quarter. Looking at the downturn in the domestic refractories and downstream steel industry in the short term, Punai Co., Ltd. is focusing on overseas business. Production at the two major factories in the US and Serbia is gradually on the right track. Considering that the profit performance of overseas business is significantly better than domestic, the increase in overseas revenue is expected to partially or fully hedge against the decline in the domestic profit side.

Domestic profits are affected by increases in raw material prices and terminal price pressure, while overseas profits are affected by phased exchange fluctuations.

The overall gross profit margin of Q3 was 17.73%, with a decrease of 2.67 pct and 0.75 pct, respectively. The decline in gross margin was mainly affected by the increase in raw material prices. The superposition terminal price did not transfer smoothly, and raw materials accounted for more than 70% of the cost composition of refractory materials. Recently, the price of alumina raw materials rose sharply, and the price increase of magnesium refractory materials continued, while downstream Q3 customers proposed price cuts, increasing the company's cost burden. In terms of expense ratio, the Q3 company's expense ratio was 19.04%, up 4.26 pct and 5.98 pct, respectively. Among them, the financial expense ratio increased by 1.73 pct and 3.07 pct, respectively. The increase was the most significant, mainly due to the exchange loss of 27.87 million yuan this quarter.

The second growth curve anticipates greater performance flexibility. The Tibet mine acquired by Punai Co., Ltd. is a highly scarce high-grade cryptocrystalline magnesite. The processed product active magnesium oxide can be used as a precipitant for wet extraction of cobalt/nickel. Currently, it has connected with many downstream customers. Progress includes various stages such as small testing, pilot testing, and order batch negotiations. Since the gross margin of activated magnesium oxide used in the non-resistant industry is much higher than that of the refractory industry, and theoretically, the annual extraction volume of 1 million tons in Tibet mines can process more than 0.4 million tons of active magnesium oxide, and the supply is large, this business is expected to become the company's biggest profit growth point in the future.

Profit forecast and investment suggestions: Pu Nai Co., Ltd. is a leading domestic refractory company. It has three major highlights: the domestic refractory market share continues to increase, the overseas refractory market contribution is gradually showing, and the second growth curve is imminent. Considering the severe market environment since Q3, we lowered the profit forecast for Punai Co., Ltd., and the company's net profit to mother for 2024-2026 is 0.15 billion, 0.29 billion, and 0.51 billion, respectively. The corresponding PE is 27X, 14X, and 8X, respectively. We continue to make key recommendations and maintain a “buy” rating.

Risk warning: risk of a sharp decline in steel production; risk of overseas business expansion falling short of expectations; risk of large fluctuations in raw material prices.