Description of the event

In the first three quarters, Keda Manufacturing achieved operating income of 8.56 billion yuan, a year-on-year increase of 22%, and attributable net profit of about 0.7 billion yuan, a decrease of 65% year-on-year, and a decrease of 67% year-on-year after deducting non-net profit. The third quarter achieved operating income of 3.07 billion yuan, a year-on-year increase of 35%, and attributable net profit of 0.25 billion yuan, a year-on-year decrease of 67%. After deducting non-net profit of 0.24 billion yuan, a year-on-year decrease of 68%.

Incident comments

Profitability improved markedly from month to month. The company's revenue increased 22% year-on-year in the first three quarters, accounting for more than 60% of overseas business revenue. First, it was due to an increase in overseas building materials revenue, and the other was due to an increase in overseas orders for machinery and equipment. The company's inventory turnover in the first three quarters was 182 days, down about 23 days from the previous year, which meant that demand in the machinery, equipment and overseas building materials business had recovered. The company's profitability began to improve month-on-month, mainly due to price increases in the overseas building materials business. The African market re-entered an upward channel after short supply in 2021-2022 and the 2023-2024 price war. The gross margin for the first three quarters was about 26.9%, down 4.4 percentage points year on year. The gross margin for the third quarter was about 29.2%, up 5 percentage points from month to month. The company's rate for the first three quarters was about 20.2%, an increase of 4.4 percentage points over the previous year. The rate for the third quarter was about 22.8%, an increase of 4.3 percentage points over the previous year. Among them, the financial rate increased 6.0 percentage points, mainly due to increased financial expenses due to exchange rate fluctuations.

The global competitiveness of machinery and equipment has increased. Benefiting from the global layout, localized services and continuous improvement of brand production lines, the company's ceramic machinery business orders and revenue amounts remained at a good level, and accessories, consumables and general-purpose equipment ushered in rapid growth. The company continues to empower the “equipment+accessories, consumables+service” business portfolio, actively promote the construction of a Turkish production base and a new Sinocera Kanglitai base in Foshan, enhance the core competitiveness of products, and achieve localized services for multiple production regions and customers.

Net interest rates on overseas building materials have increased, but foreign exchange losses are large. With the successive commissioning of two ceramic tile production lines in Cameroon, overseas building materials production and sales achieved steady growth. The company's ceramic tile product prices in different African countries increased in the third quarter, and gross margin increased month-on-month, but the depreciation of some African currencies led to a sharp increase in the company's current exchange losses, and the overall profit margin of the overseas building materials business was compressed. We determine the source of the company's exchange losses: first, unrealized exchange losses due to euro debt; the company applied for long-term financial support of 0.2 billion euros in 2023. Strong euro will cause exchange losses in stages; second, exchange losses due to fluctuations in African local currencies. Other than Ethiopia, currencies in other regions of Africa were relatively stable in the 3rd quarter.

Lanke Lithium's bottom profit is impressive. In the first three quarters of 2024, we produced about 0.0309 million tons of lithium carbonate products and sold about 0.0283 million tons of lithium carbonate products. Affected by the decline in lithium carbonate market prices and retroactive adjustments confirming the purchase amount of lithium brine in the previous period, Lanke Lithium's performance declined sharply. The first three quarters achieved revenue of 2.22 billion yuan, net profit of 0.54 billion yuan, and net profit of 0.235 billion yuan. Looking at the third quarter of a single quarter, the average price of lithium carbonate has fallen to 0.067 million/ton, but the company still achieved a good profit, showing a net profit of about 0.1 billion yuan, corresponding to a profit of 0.028 million yuan per ton, reflecting the leading cost advantage of Lanke Lithium.

The buyback shows the company's confidence in operating. The company plans to use its own capital and a special loan for share repurchase to repurchase 20-30 million shares at a price of no more than 10 yuan/share to implement employee stock ownership plans and/or equity incentives. Fluctuations in the company's performance over the past three years have mainly come from Lanke Lithium. Currently, Lanke Lithium's operations have bottomed out. At the same time, overseas building materials have ushered in an inflection point in net interest rates, machinery and equipment revenue has bucked the trend, and the three major businesses are expected to resonate and improve. The company's net profit for 2024-2026 is estimated to be about 1.05, 1.4, and 1.54 billion yuan, corresponding to valuations 15, 11, and 10 times, and a purchase rating.

Risk warning

1. Low expectations for the company's overseas production capacity investment;

2. Competition in the African building materials market has intensified.