Incident: On October 24, 2024, Chengcheng Co., Ltd. released its 2024 three-quarter report. The company's revenue for the first three quarters of 2024 was 1.634 billion yuan, up 23.57% year on year; net profit to mother was 0.379 billion yuan, up 24.34% year on year; net profit after deducting non-net profit was 0.369 billion yuan, up 28.73% year on year. The corresponding company's 3Q24 revenue was 0.563 billion yuan, up 19.15% year on year, up 2.69% month on month; net profit to mother was 0.117 billion yuan, up 3.65% year on year, down 15.81% month on month.

The increase in sales combined with the increase in product profit levels, led to a year-on-year increase in the 3Q24 company's performance. According to the company's announcements for the second and third quarters of 2024 and the third quarter of 2023, 3Q24's silicon dioxide production was 92,706.61 tons, up 15.08% year on year, up 2.12% month on month; sales volume was 91393.86 tons, up 13.40% year on year and 2.17% month on month. We believe that the increase in the company's silicon dioxide production and sales is mainly related to the gradual expansion of 0.075 million-ton silica fund-raising projects and the increase in the capacity utilization rate of the Thai factory. In terms of product prices, the average price of 3Q24's silica products rose 5.19% year on year and 0.92% month on month. In terms of raw materials, the purchase price of soda ash in 3Q24 fell 13.40% year on year, down 7.16% month on month; quartz sand price decreased 0.77% year on year, down 0.64% month on month; sulfur price increased 42.99% year on year, up 13.19% month on month. In terms of gross margin, the overall gross margin of the 3Q24 company was 33.94%, up 1.53 pcts year on year and down 0.54 cts month over month.

We believe that the year-on-year increase in the company's overall gross margin may be related to the company's gradual mass commercial supply of biomass (rice husk) highly dispersed silica.

The company's sales expense ratio for the first three quarters was 0.58%, up 0.07 pcts year on year; management expense ratio was 3.20%, down 0.48 pcts year on year; financial expense ratio was -1.06%, up 3.20 pcts year on year; and R&D expense ratio was 3.27%, up 0.03 pcts year on year.

The company's net cash flows changed significantly in the first three quarters of 2024. The company's net cash flow from operating activities in the first three quarters of 2024 was $0.41 billion, up 57.50% year on year; net cash flow from investment activities was -0.129 billion yuan, up 65.49% year on year; net cash flow from financing activities was -0.209 billion yuan, down 612.67% year on year. Accounts receivable increased 4.46% year over year, and the accounts receivable turnover increased from 2.62 in the same period in 2023 to 3.37. Inventories increased 39.33% year over year, and inventory turnover increased from 5.16 times in the same period in 2023 to 5.78 times.

The company is deeply involved in the field of silica, and the added value of products is expected to increase in the future. According to the company's foreign investment announcement on August 23, 2024, the company plans to use its own capital to invest 0.5 billion yuan to build 3044 tons/year silica microspheres, 0.5 million/year agarose microspheres, and 1,590 tons/year by-product sodium carbonate projects. Silica microspheres and agarose microspheres are downstream extensions of the company's silica products, which are high-demand fine chemicals. The implementation of the microsphere project will diversify the company's products, achieve domestic substitution for similar products, and further enhance the influence and market competitiveness of the company's industry. We are optimistic that the company's products will expand to downstream fine chemicals, and the added value of the products is expected to increase further.

Investment advice: We expect the 2024-2026 revenue of Chengcheng shares to be 2.186/2.474/2.779 billion yuan, up 20.8%/13.2%/12.3% year on year, and net profit to mother of 0.526/0.616/0.719 billion yuan respectively, up 27.6%/17.1%/16.6% year on year, corresponding EPS of 1.27/1.48/1.73 yuan respectively. Combined with the company's closing price on October 25, the corresponding PE was 14/12/10 times, respectively. We are optimistic that the company's products will expand to downstream fine chemicals. The added value of the products is expected to increase further and maintain the “buy” rating.

Risk warning: raw material price fluctuation risk, environmental risk, macroeconomic fluctuation risk, R&D risk, management risk, exchange rate fluctuation risk