Eastern Fulong released its report for the third quarter of 2024. 2024Q1-Q3 achieved operating income of 3.49 billion yuan, a year-on-year decrease of 19.32%; net profit to mother of 0.153 billion yuan, a year-on-year decrease of 73.82%; net profit without deduction of 0.132 billion yuan, a year-on-year decrease of 75.50%. 2024Q3 achieved operating income of 1.199 billion yuan, a year-on-year decrease of 12.78%; net profit to mother was 38.78 million yuan, a year-on-year decrease of 75.35%; net profit after deduction was 32.92 million yuan, a year-on-year decrease of 77.52%.

Opinion: Under the influence of tight investment and financing and increased competition in the industry, the Q3 performance growth rate continued to slow, and the profit side's poor performance on the revenue side was mainly due to fluctuations in gross margin. Contract debt increased month-on-month, laying the foundation for future performance. The company actively expands overseas markets, strengthens local operation capabilities, gradually expands the number of overseas customers and coverage areas, and opens up a growth ceiling.

Q3 Performance growth continued to slow, and margin fluctuations caused profit side performance to fall short of revenue side. Under the influence of tight investment and financing and increased competition in the industry, the growth rate of 2024Q3 performance continued to slow, and the profit side's performance fell short of the revenue side mainly affected by gross margin fluctuations and credit impairment losses. The gross margin of 2024Q3 was 27.79% (year-on-year - 8.94 pct), mainly due to: 1) intense competition in the industry. In order to stabilize and expand market share, the company made dynamic adaptations in product, customer and regional coverage strategies; 2) There was no significant shift in domestic biomedical financing. The company was cautious about capacity expansion and new pipeline construction, slowing down the progress of fixed asset investment, which required capital, and the demand for pharmaceutical equipment declined in stages.

As the company actively promotes products overseas and reaches strategic cooperation with major product component suppliers, gross margin is expected to improve.

Contract liabilities and inventory increased month-on-month, and the expense ratio remained stable year-on-year during the period. As of 2024Q3, the company's contract liabilities were 3.382 billion yuan, up 0.284 billion yuan month-on-month; inventory was 3.519 billion yuan, up 0.047 billion yuan month-on-month. Contract debt is a leading indicator of order-based enterprise performance, and the continuous increase in contract debt lays a good foundation for future performance release. The 2024Q3 sales expense ratio was 5.85% (YoY -1.30pct), management expense ratio 10.80% (YoY +1.51pct), R&D expense ratio 7.74% (YoY +0.07pct), and the cost control during the period was good.

Actively explore overseas markets and open the ceiling for long-term growth. 2024H1's overseas revenue was 0.493 billion yuan, accounting for 21.51%. The company is a pioneer in domestic pharmaceutical equipment going overseas. It began exporting products in 1999, and has successively set up overseas subsidiaries to strengthen localized marketing and services, and establish joint ventures and technical cooperation with partners in the United States, Europe, Japan, etc. As of 2024H1, the company has covered more than 50 countries and regions, serving nearly 3,000 well-known pharmaceutical companies around the world, and the international strategy has achieved remarkable results.

Profit forecasting and investment advice. Considering tight financing and increased competition, we expect the company's revenue to be 4.987, 5.117, and 5.444 billion yuan respectively in 2024-2026, up -11.6%, 2.6%, and 6.4% year on year; net profit to mother will be 0.329, 0.387, and 0.492 billion yuan, respectively, up -45.2%, 17.7%, and 27.1% year over year; corresponding PE is 32X, 27X, and 21X, maintaining a “buy” rating.

Risk warning: New orders fall short of expectations; overseas expansion falls short of expectations; risk of deteriorating competitive landscape.