Event: On October 26, 2024, Dongcai Technology released its 2024 three-quarter report. The company's revenue for the first three quarters was 3.245 billion yuan, up 14.85% year on year, net profit to mother was 0.236 billion yuan, down 22.77% year on year, and 0.16 billion yuan, down 14.02% year on year; the corresponding company's 3Q24 revenue was 1.123 billion yuan, up 12.67% year on year, down 6.52% month on month; net profit to mother was 0.076 billion yuan, down 10.71% month on month, down 29.99% month on month.

Comment: The commissioning of new projects contributed to the increase in revenue, and the decline in product gross margin had an impact on the company's profitability.

The year-on-year increase in the company's revenue in the first three quarters of 2024 is mainly related to the gradual release of production capacity for new industrialization projects (new energy materials, optical film materials, electronic materials), and the increase in production and sales volume and revenue scale.

According to the company's main business data for the first three quarters of 2024, the sales volume of the company's electrical insulation materials/new energy materials/optical film materials/electronic materials/environmentally friendly flame retardant materials in the first three quarters of 2024 was 36848.38/51193.84/71631.16/42699.42/11528.25 tons respectively, up 35.52%/20.00%/5.89%/38.54%/54.31% year-on-year.

In terms of product prices, the phased supply and demand conflict in the photovoltaic and epoxy resin industry chains is still very prominent. Homogenization competition has intensified, and the gross margin of segmented products such as solar backpanel substrates and epoxy resins has declined markedly. According to the company's main business data for the first three quarters of 2024, the average sales price of the company's electrical insulation materials/new energy materials/optical film materials/electronic materials/environmentally friendly flame retardant materials in the first three quarters of 2024 was 9525.03/19959.66/11712.85/18819.40/9746.37 yuan/ton, respectively. The year-on-year changes were -18.43%/-14.37%/6.20%/-5.49%/-8.60%, respectively.

The company's sales expense ratio for the first three quarters was 1.25%, down 0.10 pcts year on year, management expense ratio was 1.79%, down 1.46 pcts year on year, R&D expenses rate was 4.33%, down 1.10 pcts year on year, and financial expenses ratio was 2.00%, up 0.62 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 -0.043 billion, up 67.33% year on year; net cash flow from investment activities was -0.616 billion, down 118.43% year on year; net cash flow from financing activities was 0.484 billion, up 6294.69% year on year, and the balance of cash and cash equivalents at the end of the period was 0.8 billion billion, down 13.55% year on year.

Accounts receivable increased 17.90% year over year, and the accounts receivable turnover increased from 3.96 times in the same period in 2023 to 4.04. Inventory fell 8.61% year over year, and inventory turnover increased from 4.68 times in the same period in 2023 to 5.54.

The company is building an electronic materials project for high-speed communication substrates with an annual output of 20,000 tons, and the product structure is expected to be further enriched. According to the company's project feasibility analysis report of August 23, 2024, the “electronic material project with an annual output of 20,000 tons of electronic materials for high-speed communication substrates” includes an annual output of 5,000 tons of electron-grade low dielectric loss thermosetting polyphenyl ether resin, 2000 tons of electron-grade amorphous maleimide resin, 1500 tons of electron-grade crystalline maleimide resin, 4000 tons of electron-grade low dielectric loss active ester curing agent resin, 3,500 tons of electron-grade low medium loss phosphorous flame retardant resin. We are optimistic about the gradual progress of the company's projects, and the product structure is expected to be further enriched in the future.

The actual controllers of the company acted in concert to increase their holdings, demonstrating confidence in the company's future development. According to the announcement of the company's shareholding increase plan on October 1, 2024, Mr. Yuan Chengcheng, the actual controller of the company, increased his holdings of the company's shares by a total of 5749,800 shares through centralized bidding, accounting for 0.6412% of the company's total share capital. The amount of increase in holdings was RMB 47.97 million yuan. After this increase in holdings, the actual controller and its co-actors held a total of 26.66% of the shares. Meanwhile, Mr. Yuan Chengcheng plans to continue to increase his holdings of the Company through centralized bidding within 6 months from the date of disclosure of the announcement. The increase amount will not be less than RMB 50 million and no more than RMB 0.1 billion (including the amount of shares already increased). We believe that the concerted actions of the actual controllers of the company increased their holdings in the company, demonstrating the company's actual controller's confidence in the company's long-term future development.

Investment advice: We expect Dongcai Technology's revenue for 2024-2026 to be 4.425/5.591/6.695 billion yuan, up 18.4%/26.4%/19.7% year on year, and net profit to mother of 0.349/0.482/0.612 billion yuan respectively, up 6.2%/38.0%/27.0% year on year, corresponding EPS of 0.38/0.53/0.67 yuan respectively.

Combined with the company's closing price on October 29, the corresponding PE was 22/16/13 times, respectively. We are based on the following two aspects: 1) We are optimistic about the gradual progress of the company's projects, and the product structure is expected to be further enriched in the future; 2) We believe that the company's actual controllers will act in concert to increase the company's shares, demonstrating the company's actual controller's confidence in the company's long-term future development and maintaining a “buy” rating.

Risk warning: external economic environment and market risk, risk of underutilization of production capacity, risk of fluctuation in raw material prices, risk of brain loss and rising labor costs, risk of production safety and environmental protection, risk of exchange rate fluctuations