Incident: The company released its 3Q2024 financial report. In the first three quarters, it achieved revenue of 0.242 billion yuan, -10.30% year on year, net profit to mother of -0.04 billion yuan, +24.46% year on year, after deducting non-net profit of -0.057 billion yuan, -11.72% year on year, gross profit margin of 30.60%, and +0.78 pct year on year.

Multiple factors affected profit pressure in a single quarter: 3Q2024 achieved revenue of 0.093 billion yuan, -4.64% /month-on-month +14.81%, realized net profit to mother -0.018 billion yuan, +99.63%/month-on-month +127.97%, deducted non-net profit -0.022 billion yuan, +71.58% /month-on-month +65.98%, gross profit margin of 28.86%, year-on-year -8.34pct/month-on-month -4.98pct. The company's Q3 revenue declined year-on-year. We judge that gross margin was affected by copper foil product shipment control. Gross margin declined a lot in a single quarter, mainly due to increased competition for smartphones, which had a certain impact on sales volume, price, and product structure. Shipments of high-end shielding films declined, and overall unit prices declined.

In terms of expenses, the company's sales/management/ R&D/ financing/ total cost ratios were 2.47%/15.29%/22.22%/2.96%/42.93%, respectively, with year-on-year changes of -0.21/+1.96/+5.97/+1.93/+9.65pct respectively. The R&D cost rate increased significantly. The company concentrated on R&D of multiple materials such as copper, flexible copper clad plates, shielding films, and thin film resistors, but it has not yet been implemented, which has had an impact on short-term profits; at the same time, the company has increased R&D, production, and quality in order to strengthen competitiveness Labor expenses have increased due to the introduction of talents from the field.

I am optimistic that multiple materials are progressing smoothly: 1) Peelable copper for IC carrier boards continues to receive small-batch orders, and joint terminals are promoting applications in scenarios such as mobile phone chip packaging and motherboard RCC. 2) The second phase of the FCCL production line has been commissioned and installed, with a monthly production capacity of 0.325 million square meters. FCCL for homemade copper foil production continues to receive small-batch orders, and FCCL for homemade copper foil+homemade PI/TPI production has carried out downstream testing and certification in an orderly manner. 3) The resistor film for mobile phone acoustics is in the customer certification stage. Some customers have basically completed factory audits and received small-batch orders; thermistor films for chip thermal management closely cooperate with customers to carry out R&D and sample delivery testing. 4) In terms of copper foil for electromagnetic shielding of high-speed copper cables, the company closely interacts with terminals and domestic and foreign cable suppliers. The sample delivery tests meet the requirements, and the key indicators are superior to competing products. Further product optimization and business negotiations are currently being carried out. 5) According to the latest requirements of leading consumer electronics terminals, development and downstream testing and certification of cutting-edge products such as RCC/FRCC/ultra-thin dielectric layer FCCL are being carried out using self-peelable copper, ABF-like resin materials and synthetic technology.

Investment advice: The company's performance is under pressure in the short term, and various materials are progressing smoothly, and there is considerable room for the future. We expect the company's 2024-2026 net profit to be -0.043/0.053/0.138 billion yuan, EPS -0.53/0.65/1.71 yuan, and 2025/2026 PE 59.31/22.62 times, maintaining the “gain” rating.

Risk warning: risk of further decline in demand for shielding film; risk of industrialization of high-end materials such as peelable copper falling short of expectations; risk of rising raw material prices.