3Q24 results fell slightly below our expectations

The company announced its three-quarter report: 1-3Q24 revenue of 2.57 billion yuan, +3.0% year on year; net profit of 0.13 billion yuan, +3.5% year on year; net profit of non-return to mother 0.13 billion yuan, +5.2% year over year. 3Q24's revenue was 0.92 billion yuan, -0.9%/+5.4% YoY; net profit to mother was 40.44 million yuan, -10.4%/-12.8% YoY; net profit not attributable to mother was 40.19 million yuan, -11.8%/-11.9% YoY. 3Q24's performance was slightly lower than our expectations, mainly due to the company actively adjusting the product structure and pre-investment of the period expenses.

Development trends

Actively optimize product structures, and profitability is under month-on-month pressure. The China Automobile Association showed that 3Q24 passenger car sales volume was -3%/+8% month-on-month to 6.627 million units. We believe this was mainly due to the company's strategy of voluntarily abandoning some low-margin orders and seeking high-margin products. The company's 3Q24 gross margin was -0.4 pct/-0.8 pct to 12.5% month-on-month, which was affected by factors such as fluctuations in raw copper prices and rising production capacity at the Macheng plant. The company's 3Q24 sales/management/R&D/finance expense ratio was 0.5%/2.0%/3.5%/2.0%, +0.1pct/+0.9pct/+0.3pct month-on-month. The development of new projects such as automobile cables and high-frequency high-speed copper cables increased R&D investment, and interest accrued on convertible bonds affected financial expenses.

Domestic and international production capacity is progressing steadily, and the Mexican plant is opening up space in the North American market. The company operated steadily at its six major domestic production bases in Ningbo/Benxi/Chengdu/Shanghai/Huizhou/Macheng. The 1-3Q24 capital expenditure was 0.28 billion yuan, a record high during the same period. In January 2024, the company issued an announcement to invest in the construction of a Mexican production base. On September 25, the company announced that the production equipment in the Mexican plant has been installed and commissioned and is about to enter the trial production stage. We believe that the company can accept overseas orders from existing customers and expand the North American market share through the Mexican factory. In addition, the automotive cable industry has a high degree of equipment automation and low dependence on labor costs. We expect the company's overseas shipment volume and revenue profit to grow rapidly after the factory is put into operation.

Entering the field of high-frequency high-speed copper cables, the layout is forward-looking. In August, the company announced the establishment of a wholly-owned subsidiary, KABEYI Zhilian, to use existing technical reserves, human resources and Rosenthal equipment to produce high-speed high-frequency copper cable products used in data centers, cloud storage, and artificial intelligence servers. On September 25, the company announced that it is actively procuring new production line equipment. Samples of high-speed high-frequency copper cable products are in the internal inspection stage and are about to be delivered. The company expects to generate related revenue and profits in 2025 and beyond. We believe that based on the advantages of customer resources, equipment procurement, technology research and development in the main automotive cable business, the company's forward-looking layout is expected to open up room for long-term growth.

Profit forecasting and valuation

Due to the company actively adjusting the order structure and increasing upfront investment in overseas and emerging businesses, we lowered our 2024/2025 profit forecast by 14.7%/10.2% to 0.186/0.237 billion yuan. Maintaining an outperforming industry rating, the current stock price corresponds to 27.7/21.7 times 2024/2025 P/E. Considering the company's entry into the cutting-edge field of high-frequency high-speed copper cables for communications and the upward shift in the valuation center of the sector, the target price remained unchanged at 42 yuan, corresponding to 28.2/22.1 times the 2024/2025 P/E, and there is 1.8% upward space compared to the current stock price.

risks

The risk of copper price fluctuations, falling short of expectations in production capacity, and the risk of overseas operations.