Aerospace Nanhu released three quarterly reports: Q3 achieved revenue of 20.3613 million yuan (yoy -85.94%, qoq -46.87%) and net profit to mother of -19.2911 million yuan (yoy -269.02%, qoq +16.89%). Q1-Q3 2024 achieved revenue of 0.086 billion yuan (yoy -82.97%), net profit to mother of -58.6508 million yuan (yoy -243.29%), after deducting non-net profit of -60.404 million yuan (yoy -376.79%). Due to fluctuating orders in the industry and the impact of insufficient market demand, the company's performance declined significantly, but considering that the military industry has strong plans for equipment construction during the 14th Five-Year Plan and that personnel adjustments are gradually being put in place, industry demand and orders are expected to reach an inflection point. The company's performance may have a lot of room for improvement next year, so we maintain a “buy” rating.

Inventory growth is significant, and downstream demand may have gradually recovered

The company was affected by the industry, leading to weak demand and orders, while R&D investment remained high, resulting in negative net profit to mother. On the balance sheet side, inventory as of the end of the third quarter was 0.515 billion yuan, up 39.69% year on year, and contract debt was 0.156 billion yuan, up 32.50% from the level at the beginning of the year, or indicating that the company's downstream demand is already recovering at the bottom, and the company is actively preparing for production.

The gross margin is likely to rebound throughout the year. The gross margin of the company that maintained high R&D investment was 18.57% in the first three quarters, a decrease of 9.26 pct compared to the same period last year. This is mainly due to changes in the product delivery structure, and at the same time, there were price reductions for some products. Due to the company's small delivery volume in the first three quarters, gross margin may be distorted, we believe that with the peak delivery period in the fourth quarter, the company's overall gross margin level is expected to increase. The company's expense ratio for the first three quarters was 108.59%, up 83.91 pcts from the same period last year; mainly due to the decline in the company's revenue, but expenses were relatively rigid. Furthermore, the company's R&D investment also maintained a high level, laying the foundation for subsequent model expansion and expansion of growth points.

The military trade and low-altitude economy are booming, and growth points continue to expand

According to the company's official public account, the company's Type 1 high-end military trade product has passed the design certification. Currently, in addition to on-going orders, several potential users have submitted procurement intentions; in addition, the company's newly developed “Low Altitude Sentinel” control system was recently unveiled in field tests invited by customers, and the company will rely on this product to continue to lay out the low-altitude economy. The company's rapid development in the fields of military trade and low-altitude economy will effectively enhance the stability of the company's operations and expand performance growth points.

Profit forecasting and valuation

We estimate that the company's net profit for 24-26 will be 0.034/0.163/0.209 billion yuan (previous value 0.096/0.164/0.215 billion yuan). The reason for the reduction was fluctuations in industry demand in 24 years. At the same time, the company's R&D investment intensity was high, and the corresponding EPS was 0.1/0.48/0.62 yuan. Comparable to the company's 25-year iFind's consistent forecast is 45 times. Considering the company's positive development in the military trade and low-altitude economy, which helps the company's long-term development, the company was given a 25-year 50 PE valuation, and the corresponding target price was 24.00 yuan (previous value was 15.92 yuan).

Risk warning: Risk of product price reduction, risk of military trade business falling short of expectations.