Matters:

The company announced that Sun Company, Chengdu Wangjin, became a batch supplier of lightweight chassis assembly products for two new platform projects of an independent domestic brand, with a total life cycle value of about 3.395 billion yuan.

Ping An's point of view:

The lightweight business has plenty of on-hand orders. The ball hinge assembly product of Sichuan Wangjin Company, a subsidiary of Zhongding, is the core safety component and performance component of the chassis system, and has a high technical threshold. Zhongding's lightweight business has grown at a high rate in recent years. The business segment has risen from 0.44 billion revenue in 2020 to an annual sales scale of about 3 billion. According to the 2024 mid-term financial report, the company's lightweight business received cumulative orders of about 4.6 billion yuan in the first half of 2024. The value of bicycle support in the lightweight business is generally above 1,000 yuan. The customer support relationship is generally stable, and I am optimistic about the profit flexibility brought by Zhongding Co., Ltd.'s lightweight business entering a period of scale effect.

The air suspension business is growing at a high rate, and the barriers to core components are high. The air suspension racetrack has broad room for growth, and the supporting models of brands such as Quanjie/Ideal/Xiaomi have a strong demonstration effect. German AMK, a subsidiary of Zhongding, is a high-end supplier of air suspension systems. The localization rate of AMK's air supply unit products in China is gradually increasing. Dingyu Technology, a subsidiary of the company, will achieve integrated supply of self-developed and self-produced air springs, air supply units and air storage tank products within 2024, laying the foundation for Zhongding Co., Ltd. to further expand the air suspension system assembly product market in the future.

Traditional business performance has been steady, and overseas business fee control has been effective. Businesses such as sealing, cooling, shock absorption and noise reduction performed steadily, contributing to the company's stable profits. Currently, the share of overseas business revenue is estimated to be less than 50%. Since 2020, Zhongding has built a global organizational structure system based on five major divisions to strengthen the management of overseas enterprises by the Chinese management team. Currently, it is believed that overseas fee control is effective, which is conducive to reducing the company's overall cost rate level.

Profit forecast and investment advice: Since the third quarter of 2022, Zhongding Co., Ltd. has maintained a year-on-year growth trend of quarterly deducted non-net profit. In 2024, the company maintained a steady increase in overall gross margin while continuing to break through high-growth businesses such as weight reduction and air suspension. Looking ahead to 2025, the cooling business of Zhongding Co., Ltd. will benefit from the expansion of hybrid vehicles represented by extenders, the air suspension business will benefit from maintaining high growth in the demonstration effect of popular models from benchmark brands, and the lightweight business will benefit from the increase in production and sales scale of supporting customers, showing a stronger scale effect. According to the latest situation, we have adjusted the company's performance forecast. The net profit from 2024 to 2026 is expected to be 1.37 billion/1.65 billion/1.98 billion (the previous forecast value was 1.39 billion/1.65 billion/1.88 billion). The company's steady performance and high-growth business performance is in line with expectations. The current valuation is low, and the “recommended” rating for the company is maintained.

Risk warning: 1) The overseas business revenue scale is high, but the profit contribution is low, and the margin increase falls short of expectations; 2) the new business faces fierce competition, leading to pressure on profitability; 3) the production and sales volume of major supporting customers falls short of expectations; 4) the penetration rate of air suspension systems falls short of expectations.