3Q24 results fell slightly below our expectations

The company announced 3Q24 results: 1-3Q company revenue of 59.54 billion yuan, +11.3% YoY; net profit to mother 0.79 billion yuan, +10.1% YoY. Looking at a single quarter, 3Q24 had revenue of 20.8 billion yuan, +14.0%/-0.7% YoY, 3Q24 net profit of 0.21 billion yuan, and +0.9%/-28.5% YoY.

The increase in expenses during the period was the main reason for the month-on-month decline in the company's 3Q24 profit. In terms of gross profit and gross margin, the 3Q24 company's gross profit was 0.71 billion yuan, +12.9%/-5.0% month-on-month, and gross profit margin of 3.4% in a single quarter, -0.15ppt. Looking at the cost of the period, due to the increase in management expenses and R&D investment, the 3Q24 company's total expenses during the period were 0.38 billion yuan, +86.37 million yuan month-on-month, an increase of +29.1%. The corresponding period cost ratio was 1.84%, +0.43ppt. In terms of cash flow, due to the elimination of the company's product inventory and strengthened cash flow management, the net cash flow from 3Q24 operating activities was 1.21 billion yuan, a significant increase from 61.53 million yuan in 2Q24.

Development trends

First, in line with demand trends, the company continues to promote the construction of high-end production capacity at home and abroad. In terms of vehicle weight reduction, according to the National Bureau of Statistics, China produced 8.439 million new energy vehicles in 1-3Q, cumulative year-on-year +33.8%, and September production was +48.5%/+18.4% month-on-month. As of the three-quarter report, the company's lightweight automobile production capacity in Inner Mongolia and Jiangsu has gradually been implemented, and the Mexican automobile lightweight aluminum project has completed land purchases. In terms of 3C consumer electronics, Apple launched the iPhone 16 series in September, and stated that the body of the product uses 85% recycled aluminum alloy.

Furthermore, according to the National Bureau of Statistics, the cumulative year-on-year ratio of smartphone production in January-September was +10.5%, which we believe is expected to drive an increase in demand for aluminum products. As of the three-quarter report, the company has expanded production capacity for 3C consumer electronics profiles in Shandong and Vietnam, and the company expects some production lines in Vietnam to be put into operation one after another by the end of 2024.

Second, the company has become an important supplier of lightweight automotive materials and works closely with leading companies in various fields. As of the third quarterly report, in the field of automobile lightweighting, the company has become a supplier of leading brands such as BMW, Mercedes-Benz, Audi, BYD, Ideal Auto, Ningde Era, and Xiaomi Auto, and ranks among the leading suppliers of domestic automobile lightweighting. The company signed a “Strategic Cooperation Agreement” with Grangis, a global leader in heat exchangers, and the two sides have been upgraded to long-term strategic partners. In the field of 3C consumer electronics, the company has deepened cooperation with IFF to supply profile products to the world's leading 3C companies, and its leading position is stable.

Third, the company continues to develop low-carbon aluminum production capacity, and the advantages of low carbonization are expected to continue to increase. According to the company's announcement, the company's current recycled aluminum production capacity is about 1 million tons, and the company plans to expand the recycled aluminum production capacity to 2.05 million tons in the long term. The company is actively increasing its production capacity. The company expects the production capacity of aluminum bars produced using hydroelectric aluminum in Yunnan to reach 0.6 million tons by the end of 2025 and 0.9 million tons by the end of 2030; the company plans to use green electric aluminum resources in Inner Mongolia, and is expected to increase the proportion of green aluminum used in Inner Mongolia to 50% by the end of 2026.

Profit forecasting and valuation

Due to increased competition for processing fees and increased expenses, we lowered the company's 2024/2025 net profit of 11.0%/11.9% to 1.11/1.28 billion yuan. The current stock price corresponds to 15.4/13.3 xp/E 2024/2025. Considering the company's high potential for high-end business growth, we maintain an industry rating and target price of 5.6 yuan, corresponding to 20.7/17.9x P/E in 2024/2025, with 35% room for growth.

risks

The commissioning of the project fell short of expectations; raw material prices rose above expectations; processing fees declined beyond expectations due to increased competition.