Gaosec Co., Ltd. released a three-quarter report: Q3 achieved revenue of 0.785 billion yuan (yoy -53.51%, qoq -35.95%) and net profit to mother of -67.3974 million yuan (yoy -114.69%, qoq -210.39%). Q1-Q3 2024 achieved revenue of 3.432 billion yuan (yoy -18.50%), net profit of 0.205 billion yuan (yoy -82.49%), deducting non-net profit of 0.158 billion yuan (yoy -86.11%). The company's Q3 losses were mainly due to a phased mismatch between PV supply and demand, which led to a drop in the prices of the company's products and services, which reduced profitability. We are optimistic about the reversal of the bottom of the industry in 25 years, which is expected to drive the price of the company's products and services back up. Maintain a “buy” rating.

24Q3 gross margin declined year on month, and the company's gross profit margin for the first three quarters increased by 22.98% in the first three quarters, -23.00pp year on year, net profit margin 5.98%, and -21.87pp year on year. 24Q3's gross profit margin was 12.19%, year-on-year -32.63pp, month-on-month -6.82pp, net profit margin -8.58%, y-3.5.74pp, year-on-month -13.56pp. The company's sales/management/R&D/ finance rates for the first three quarters of 24 were 2.22%/9.18%/5.83%/0.75%, respectively, +0.12pp/+2.97pp/ -0.32pp/+0.39pp. The total rate for the period was 17.98%, +3.15pp.

We believe that the company's gross margin has declined sharply, mainly due to the phased mismatch between supply and demand in the photovoltaic industry. The price of surplus sheets and foundry costs generated by the company's diamond wire and chip foundry has dropped, dragging down the company's gross profit margin.

Tungsten diamond wire progressed smoothly, and orders for innovative business were released

The company achieved shipment of about 18 million kilometers of diamond wire in 24Q3, of which tungsten wire accounts for about 48%, and the competitiveness and market share of diamond wire products continues to increase. The company implements a tungsten wire cold drawing process, which is expected to reduce the cost of tungsten wire and enhance the profitability of the future diamond wire business. Silicon wafer and cutting processing service 24Q3 shipments are about 8.5GW, and the cost advantage of specialized silicon wafer manufacturing is obvious. The company's innovative business covers various fields such as semiconductors, silicon carbide, consumer electronics, etc., and Q3 new products have been continuously signed. In the context of deepening technology research and development, the company is expected to continue to increase its market share in all sectors in the future recovery of the industry.

Policies are being strengthened, and the relationship between supply and demand in the photovoltaic industry is expected to improve. On October 30, six departments including the National Development and Reform Commission issued “Guiding Opinions on Vigorously Implementing Renewable Energy Replacement Actions”, which proposed strengthening rigid restrictions on the use of green electricity by energy-intensive enterprises, and studying and formulating policies related to government procurement to support green products. Currently, policies and downstream projects involving the improvement of the PV supply and demand relationship are gradually being implemented. Fluctuations in industry supply and demand will immediately affect the prices of the company's products and services such as diamond wire and OEM, and are reflected in revenue and profit. We are optimistic that the recovery of the industry will drive up the price of the company's products.

Profit forecasting and valuation

Considering the company's 24Q3 gross margin decline and industry fluctuations that may affect the company's equipment order signing and acceptance pace, we lowered the company's 24-26 revenue and gross profit margin. The net profit for 24-26 is 0.318/0.401/0.476 billion yuan. Comparable to the company's 25-year Wind, the consistent expected PE is 21 times, giving the company 21 times PE in 25 years, with a target price of 15.330 yuan (previous value 13.6 yuan), maintaining the “buy” rating.

Risk warning: The price war in the main photovoltaic industry chain is intense, competition for diamond cables is intensifying, and technology research and development falls short of expectations.