We maintain the “buy” rating and target price of Times Electric (3898.HK/688187.CH).

Reiterating Times Electric's “buy” rating: Times Electric's net profit for the third quarter increased 11% year-on-year and 6% month-on-month, once again achieving steady business growth. The company's gross margin recorded 32.6%, a year-on-year decrease of 1.9 percentage points, and a month-on-month increase of 8.6 percentage points. Gross margin changed significantly due to changes in accounting standards, but the gross margin of the business itself was relatively stable. Looking ahead to next year, the rail transit business will continue to recover, benefiting from incremental demand such as overhauls. The steady expansion of Yixing's IGBT production capacity ensures the cornerstone of growth in the power semiconductor business. The company's current price-earnings ratios for Hong Kong stocks and A shares are 9.6x and 16.4x, respectively, and the valuation is attractive.

Demand in the NEV industry is driving the rapid growth of power semiconductors: Times Electric's revenue for emerging equipment in the third quarter was RMB 2.66 billion, up 14% year on year and 14% month on month, growing strongly. Among them, the two sectors of power semiconductors and new energy vehicle main drives showed outstanding growth performance.

Power semiconductor revenue reached 0.965 billion yuan, up 27% year on year and 6% month on month. Although prices such as IGBT main drives for new energy vehicles are under pressure, the company still has a strong ability to maintain a relatively stable gross margin. Revenue from the NEV main drive segment increased 67% year on year, 27% month-on-month, and market share increased.

The rail transit business continued to pick up and contribute to an increase in the Group's gross margin: Times Electric's rail transit business segment revenue increased 9% year-on-year in the third quarter, down 18% from the previous quarter, and the performance was relatively steady. The sector's revenue contribution in the third quarter was 55.2%, an increase over the same period last year. Thanks to the recovery in demand in the rail transit business and the incremental demand for high-speed rail overhauls and advanced repairs, the company's business segment grew steadily. Furthermore, the gross margin of this business segment is superior to the company average, which will play a positive role in the overall gross margin level of the Group.

Investment risks: Insufficient momentum for new energy vehicle drivers and power devices; large expansion of production capacity in the power semiconductor industry; decline in gross profit due to falling power device prices; increased industry competition dragged down profits; rail transit business recovery growth momentum is slowing down, and demand for overhaul business is insufficient.