Core views

Q3 revenue and net profit to mother were 0.58 billion yuan and 0.0.5 billion yuan respectively, +28.8% and +100.1% year-on-year respectively. It was mainly driven by the growth of the EGR+ new energy business. At the same time, profitability increased year over year, and the fee control situation was good. As a leading independent EGR and motor core business, the company has plenty of orders in hand. The EGR business will benefit from the recovery of commercial vehicles and the accelerated penetration of hybrid passenger vehicles; the implementation of new production capacity in the iron core business will facilitate the continued release of orders, and the construction of a factory in Chongqing will bind Cyrus and accelerate the upgrade to semi-assembly, which is optimistic about future performance and valuation improvements.

occurrences

The company released its three-quarter report for 2024. In the third quarter, revenue and net profit to mother were 0.583 billion yuan and 0.05 billion yuan respectively, up 28.84% and 100.12% year-on-year respectively.

Total revenue and net profit to mother for the first three quarters were 1.643 billion yuan and 0.154 billion yuan respectively, up 38.47% and 58.22% year-on-year respectively.

Brief review

Q3 performance increased year-on-year, benefiting from continued growth in EGR and new energy businesses. 24Q3's revenue and net profit for the single quarter were 0.583 billion yuan and 0.05 billion yuan respectively, +28.84% and +100.12% year-on-year respectively, +17.86% and -0.68% month-on-month respectively. On the revenue side, Q3 revenue increased both month-on-month, and sales performance was “not weak in the off-season.” The company's business mainly consists of three segments: EGR, New Energy, and Precision Components. The top two businesses account for more than 70% of total revenue. Specifically: 1) EGR: EGR revenue growth in 2024 mainly comes from the passenger car hybrid EGR business. Product sales directly benefited from high mixed sales growth for leading downstream customers such as BYD and Chery. Q3 The two OEMs sold 0.686 million and 0.071 million plug-in models respectively, +75.6% and +11760.7% year-on-year respectively, +23.2% and +84.7% month-on-month, driving the continued release of related orders. 2) New energy business: Longsheng's drive motor core business is in a period of rising production capacity, and is widely supported by mainstream NEV companies. Q3 Domestic sales of new energy passenger vehicles were +34.3% year-on-year and +19.2% month-on-month. At the same time, models such as the M7 and M9 continued to be popular, and the iron core business showed a strong trend of both supply and demand, contributing to the main revenue increase.

3) Precision parts and other businesses: The increase in precision parts revenue during the year was mainly driven by the mass production implementation of new projects in the early stages. The company previously anticipated that 18 copper row projects supporting a well-known domestic mobile phone manufacturer and other customers, as well as new projects in the fields of passive safety, chassis systems, and motor assist motors, will be mass-produced in 24H2, or contributed to some increase in performance in Q3.

On the profit side, net profit from Q3 increased year-on-year, mainly benefiting from the release of orders driven by economies of scale, compounded by steady self-fee control, and an increase in net income from other income and fair value changes; the slight month-on-month decline was mainly due to a decrease in other earnings and an increase in credit impairment losses.

Profitability is steady, and fee control is good. Q3 gross profit margin and net margin were 17.90% and 8.93%, respectively, +1.17pct and +3.15pct year-on-year, respectively, and -1.56pct and -1.43pct month-on-month, respectively.

Among them, gross margin increased year-on-year or mainly benefited from scale effects. The month-on-month decline may be due to an increase in the share of new energy businesses with relatively low gross profit. Subsequently, as production capacity climbs and orders are released, gross margin is expected to rise steadily. The Q3 period/sales/management/R&D/finance expense rates were 9.36%, 0.92%, 2.78%, 4.27%, and 1.39%, respectively. The year-on-year ratio was -0.92pct, -0.18pct, -0.78pct, -0.09pct, +0.13pct, -1.09pct, -0.51pct, -0.80pct, +0.19pct, and +0.04pct.

The growth of core businesses such as EGR and new energy has strong certainty and is expected to drive a steady upward trend in performance. 1) EGR business: First, with the high sales volume of downstream plug-in hybrid passenger vehicles, the company rapidly released hybrid EGR products, which became an important support point for the EGR sector. At present, the business has covered leading domestic customers such as BYD, Geely, Guangzhou Automobile, Chery, SAIC, and Wuling Syke. Orders for related projects are gradually being mass-produced and are expected to continue to contribute to increased performance. Second, the company's autonomous replacement in the EGR business of heavy gas trucks is progressing smoothly. 24Q2 began supporting the high-displacement gas engine project of Weichai Power, the leading domestic natural gas engine, and will be sold and promoted by Qingqi, Sinotruk, and Shaanxi Automobile, which will usher in better performance in the future. Third, the company has a backup credit advantage in the light truck and non-road EGR markets, and will benefit from a recovery in downstream demand (including the T4 phase of non-road construction machinery starting in 2023) and make a positive contribution to improving sector performance. 2) New energy business: The company's drive motor core business continues to benefit from the expansion of downstream demand and the popularity of various models from leading new energy customers. Structurally, it takes into account both expanding the number of customers and increasing the number of incremental customers. Currently, end customers include mainstream car companies such as BYD, Cyrus, Geely, Changan, Xiaomi, Ideal, NIO, SAIC, and Chery; 24H1 has successfully entered the Hefei Junlian supply chain, mainly matching passenger car and commercial vehicle models such as Skyworth and JAC.

As Longsheng New Energy continues to release new production capacity, the business is expected to continue to grow at a relatively rapid rate under strong supply and demand conditions. Furthermore, the natural gas heavy truck injection system business has been rising since 2023, and is expected to achieve steady growth based on the increase in gas vehicle sales and its own share advantage (market share of about 50% in 2023). 3) Precision parts business: Currently, it mainly focuses on precision stamping and injection molding products, focusing on core project breakthroughs, field expansion and product upgrades.

In the field of electric drive electronic control systems, the previously developed Jinkang Power copper row project was successfully mass-produced in 24H1, and the remaining 18 copper row projects (including customers such as a well-known domestic mobile phone manufacturer entering the automotive industry) will also be fully mass-produced in 24H2 and 2025. In the field of passive safety systems, PPAP was completed in the first half of the year for the designated stamping and injection molded parts project supporting Junsheng Electronics (the world's second-largest automotive safety supplier), and will enter mass production at 24H2. In the field of motor-assisted motors, the company successfully developed the international giant MAHLE electric drive project in 2023. It has now completed PPAP certification and will be mass-produced in 24H2. In terms of business development, 24H1 successfully entered the chassis system field, obtained the Mubea chassis parts mass production project, and will enter mass production at 24H2. In terms of product upgrades, the company achieved a breakthrough from automotive precision parts to small assembly products in 2024, obtained projects such as the Brose seat division and Hitachi controller small assemblies, and is expected to achieve mass production in 2025.

Invest in Chongqing to set up a joint venture, and the new energy business was upgraded to semi-assembly at an accelerated pace. On November 1, the company issued an announcement stating that it agreed that its wholly-owned subsidiary Longsheng New Energy and Maomao (Chongqing) Automobile Drive Systems Co., Ltd. will jointly fund the establishment of Chongqing Longsheng Maomao New Energy Technology Co., Ltd. The proposed registered capital of the joint venture is 0.1 billion yuan, of which Longsheng New Energy accounts for 51%. The purpose of establishing this joint venture includes responding to national policy calls and choosing to invest in the construction of a factory in Chongqing; using the superior resources of both parties to further support Cyrus, from supplying iron core components to upgrading semi-assembly products. The partner Chongqing Maomao is currently the largest automobile clutch private enterprise in Chongqing. It was founded in 1997. It mainly produces hundreds of auto parts such as commercial vehicles, passenger car series clutch plates, clutch assemblies, flywheel assemblies, and fixed rotor assemblies for new energy power motors, and is suitable for domestic, Japanese, Korean, and European and American models. After reaching this cooperation, Longsheng's core business will be upgraded at an accelerated pace in the direction of semi-assembly. Under the resonance of the new vehicle cycle and product power release of core customers such as Celis, it is expected to usher in a sharp rise in volume, price, and profit, and the development potential will further improve.

Investment advice

The company is a dual leader in the independent EGR and motor core business, and various businesses are full of orders; the EGR business benefits from the recovery of commercial vehicles and the accelerated penetration of hybrid vehicles, and the succession of new production capacity in the motor core business is conducive to the release of on-hand orders. The company's net profit for 2024-2025 is estimated to be 0.234 billion yuan and 0.316 billion yuan, corresponding to current stock prices of 26X and 19X, giving it a “buy” rating.

Risk analysis

1. The industry boom falls short of expectations. Domestic economic recovery rebounded steadily in 2024, but the exact pace remains to be seen. Demand in the automotive industry may fluctuate accordingly; it will still take time to fully implement the trade-in policy for consumer goods such as automobiles, which will affect the recovery process of industry demand.

2. The competitive pattern of the industry has deteriorated. Domestic and foreign parts suppliers compete. With changes in supply factors such as technological progress and new production capacity investment, industry competition may intensify in the future, and the company's market share and profitability may fluctuate.

3. The progress of customer development and mass production of new projects fell short of expectations. The company accelerates the expansion of new customers. Considering the fluctuation in the R&D pace of new model projects of car companies, there may be fluctuations in the fixed project cycle within a specific period of time; in addition, the mass production schedule falls short of expectations due to the company's new production capacity construction or being affected by uncontrollable factors.