Incident: On October 28, 2024, Dechang Co., Ltd. released its 2024 three-quarter report. 2024Q1-3 achieved operating income of 2.987 billion yuan, a year-on-year increase of 40.33%, and realized net profit to mother of 0.302 billion yuan, an increase of 14.50% year on year. Net profit after excluding the impact of exchange earnings was 0.295 billion yuan, an increase of 32.16% year on year. Among them, 2024Q3 achieved revenue of 1.124 billion yuan, +42.99% year over year; realized net profit of 0.094 billion yuan, +2.78% year over year. Net profit after excluding the impact of exchange earnings was 0.107 billion yuan, an increase of 15.43% year on year.

The development of multiple categories is progressing steadily, and customer cooperation continues to deepen. 2024Q1/Q2/Q3 achieved revenue of 0.825/1.038/1.124 billion yuan, a year-on-year increase of 46.14%/33.42%/42.99%. Revenue maintained a high growth trend, and Q3 accelerated month-on-month. We expect the main factors: 1) The company's vacuum cleaners will continue to grow steadily, personal care appliances and environmental cleaning appliances will continue to increase rapidly, and the development of multiple categories continues to advance. 2) The company's cooperation with Sharkninja and HOT continues to deepen, continuing the high growth trend; 3) The auto parts business has entered a peak season, and the cooperation between the company and customers continues to deepen.

Due to exchange gains and losses, the profit side is under pressure in the short term.

1) Gross profit margin: 2024Q3. The company's gross margin was 17.39%, -2.08pct year on year, mainly due to the high base for the same period last year and depreciation of fund-raising projects;

2) Net interest rate: 2024Q3, the company's net interest rate was 8.40%, -3.28pct year on year, mainly due to exchange losses;

3) Expense side: 2024Q3, the company's expense ratio was 8.26%, +1.90pct, sales/management/R&D/finance expenses were 0.40%/4.05%/3.13%/0.68%, respectively, and -0.08/-0.12/+0/+2.10pct. The increase in financial expenses ratio was mainly due to exchange losses.

Investment advice: As one of the leading vacuum cleaner manufacturers in the industry, the company's capacity expansion continues to consolidate its manufacturing scale advantage; at the same time, the EPS automotive motor business market and customers continue to expand, which is expected to achieve accelerated growth and continue to inject momentum into the company's performance growth. We expect the company's net profit to be 0.412/0.51/0.616 billion yuan in 2024-2026, respectively, 1.11/1.37/1.65 yuan for EPS, and 18/15/12 times the current share price for PE, respectively. Maintain a “Recommended” rating.

Risk warning: increased industry competition, loss of major customers, fluctuating raw material prices, and risk of exchange rate fluctuations