Incidents:

On October 28, 2024, Lianlong released its 2024 three-quarter report: for the first three quarters of 2024, the company achieved operating income of 4.27 billion yuan, +10.6% year over year; realized net profit of 0.314 billion yuan, +10.9% year on year; net profit after deducting non-return to mother 0.302 billion yuan, +11.8% year over year; net cash flow from operating activities was 0.288 billion yuan, +156.5% year over year. The gross sales margin was 21.1%, up 1.9 pcts year on year, and the net sales margin was 7.2%, up 0.04 pcts year on year.

In a single quarter of 2024Q3, the company achieved operating income of 1.45 billion yuan, +6.9% year over month; realized net profit of 0.094 billion yuan, -6.5% year on year, -16.9% month on month; net profit after deduction of 0.09 billion yuan to mother, -4.4% year on year and -20.7% month on month; net cash flow from operating activities was 0.17 billion yuan. Gross sales margin was 20.6%, +1.50 pcts year over year and -0.83 pcts month over month. Net sales margin was 6.34%, -0.92 pcts year over year and -1.33 pcts month over month.

Investment highlights:

Affected by weak downstream demand, the Q3 profit level declined month-on-month. Net profit to mother was 0.094 billion yuan in the single quarter of 2024, a year-on-year decrease of 0.006 billion yuan, and a decrease of 0.019 billion yuan over the previous year. We believe that mainly due to weak overall macro demand in the third quarter, the gross margin of 2024Q3 sales was 20.6%, +1.50 pcts year over month, and -0.83 pcts month on month. The company achieved gross profit of 0.298 billion yuan, an increase of 0.039 billion yuan over the previous year, and a decrease of 0.016 billion yuan over the previous month. In addition, 2024Q3's sales expenses increased by 0.008 billion yuan year on year, up 0.002 billion yuan; management expenses increased by 0.01 billion yuan year on year, which was basically the same; R&D expenses increased 0.027 billion yuan year over year, up 0.004 billion yuan month on month; financial expenses decreased 0.003 billion yuan year over year, up 0.01 billion yuan month on month; credit impairment losses increased 0.004 billion yuan year over year , a month-on-month decrease of 0.008 billion yuan.

New production capacity is gradually being released, and diversified layouts cultivate future growth points. According to the company's 2024 mid-year report, the progress of the technical improvement project to expand production of 0.06 million tons of antioxidants at the company's Zhuhai base by 0.06 million tons has reached 90%. In terms of lubricant additives, the company completed the construction and commissioning of Kangtai Phase II in 2023. The operating rate continued to increase in 2024, and the production capacity of the Phase I and Phase II projects formed a synergy. In the field of life science and synthetic biology, in January 2023, a pilot R&D facility with an annual output of 6 tons of nucleic acid pharmaceutical raw materials was put into operation; saffron has completed tonnage pilot scale-up and is in the process of industrialization; polyglutamic acid already has pilot amplification conditions; and projects such as hyaluronic acid and specialty amino acids and their derivatives are undergoing technical verification and optimization of fermentation, separation and purification processes.

Furthermore, the company indirectly acquired Korea's IPI to enter the electronic grade PI materials market. As of the 2024 mid-term report, the company has completed a capital increase in Yixing Chuangju. Yixing Chuangju has completed a 100% share merger and acquisition of Korean IPI. The company holds 51.18% of Yixing Chuangju's shares, and Yixing Chuangju holds 100% of Korea's IPI shares. Meanwhile, the local production line for Yixing Chuangju PI materials is being implemented and is expected to be put into use in 2025.

The profit forecast and investment rating are combined with the current competitive pattern of the company's product industry and downstream demand, and we adjust the company's profit forecast. The company's revenue for 2024/2025/2026 is 5.8, 7.1, and 8.5 billion yuan, respectively, and net profit to mother is 0.427, 0.545, and 0.656 billion yuan, respectively, corresponding to PE 15, 11, and 9 times. Maintain a “buy” rating.

Risks suggest that downstream demand is lower than expected; project construction volume is lower than expected; prices of main products are falling; prices of major raw materials are fluctuating; exchange rate fluctuations; merger and acquisition business integration falls short of expectations; and downstream application development of high-end electronic materials falls short of expectations.