Hongtian Co., Ltd. released its three-quarter report: Q3 achieved revenue of 0.379 billion yuan (yoy -17.95%, qoq +9.57%) and net profit of 0.025 billion yuan (yoy +123.11%, qoq -18.73%). Q1-Q3 2024 achieved revenue of 1.061 billion yuan (yoy -30.18%), net profit to mother of 0.085 billion yuan (yoy +40.18%), deducting non-net profit of 0.056 billion yuan (yoy +16.61%). The decline in the company's revenue in the first three quarters was mainly due to the divestment of Dawson Co., Ltd., a subsidiary in the oil drilling sector. The high increase in net profit benefited from an increase in the holding ratio of Hongtian Technology, a subsidiary in the electrolytic copper foil sector. Maintain an “Overweight” rating.

24Q3 gross margin declined year-on-month. In the first three quarters, the 24Q3 company's gross profit margin increased by 18.50% year-on-year, -1.67pp, -5.25pp, net profit margin 8.22%, +5.50pp, and -2.44pp month-on-month. The year-on-year decline in the company's gross margin is mainly due to increased competition in the lithium battery equipment industry, and the gross margin of the traditional electrolytic copper foil equipment business may have declined. The company's sales/management/R&D/finance expense ratios for the first three quarters of 24 years were 1.21%/5.45%/3.41%/1.53%, respectively, -2.62 pp/+1.24pp/ -1.05pp/+1.10pp. The total rate rate for the period was 11.60%, -1.33pp, and the cost rate control capacity improved. With the gradual divestment of the company's oil and gas business, the cost rate is expected to gradually stabilize.

Contract liabilities and inventory declined. Cash flow improved sharply year on year in the first three quarters. As of 24Q3, the company's contract debt was 0.699 billion yuan, down 13.65% from the end of 2023; inventory was 0.843 billion yuan, down 20.76% year on year. We believe that the decline in contract debt and inventory is mainly due to the release of the company's previous backlog of orders. At the same time, the expansion of production expansion by downstream copper foil merchants is slowing down, and the growth rate of traditional copper foil equipment orders is under pressure.

24Q1-Q3's net operating cash flow was -0.023 billion yuan, +86.63% year over year, mainly due to reduced procurement expenses due to the optimization of supply chain management by Hongtian Technology, a subsidiary in the electrolytic copper foil equipment sector. As the company's composite fluid collector equipment business expands, the company's order index is expected to grow.

The industrialization of composite fluid collectors is progressing steadily. I am optimistic that the company's one-step equipment will open up performance space, and the prices of copper and aluminum materials will remain high. Under the trend of power battery cost reduction and efficiency, the application of composite fluid collectors is expected to gradually be implemented. According to Gaogong Lithium Battery, the introduction of composite fluid collection equipment has accelerated since 24 years, and is mainly reflected in magnetron sputtering equipment, which is beneficial to the maturity and cost reduction of the one-step process. The company focuses on one-step equipment. The product matrix includes magnetron sputtering coating machines, vacuum evaporation coating machines, and magneto-controlled evaporation composite coating machines, with a complete layout. On July 12, 2024, the company's first composite aluminum film vacuum coating equipment was successfully delivered to customer NORD shares. The composite fluid collector equipment is expected to open up new space for the company's growth.

Profit forecasting and valuation

We maintained that the company's net profit for 2024-2026 was 0.226/0.255/0.319 billion yuan, respectively. Comparatively, the company's Wind agreed to expect PE 21 times in 25, giving the company 21 times PE in 25 years, with a target price of 26.20 yuan (previous value of 19.44 yuan), maintaining the “increase” rating.

Risk warning: promotion of composite fluid collection is progressing slowly; product verification falls short of expectations; subsidiary acquisition, integration and sales progress falls short of expectations; risk of delays or cancellations of downstream customer orders.