Key investment points

Revenue for the first three quarters of 2024 increased by about 11% year on year, and net profit to mother fell by about 44% year on year. In the first three quarters of 2024, the company achieved revenue of 0.895 billion yuan, up 11.22% year on year; net profit to mother was 89.83 million yuan, down 43.7% year on year; net profit without return to mother was 59.2 million yuan, down 54.77% year on year. By business, in the first three quarters of 2024, 1) CNC tool products achieved revenue of 0.489 billion yuan, a year-on-year increase of 3.18%; sales of 65.85 million pieces, with an average price of 7.43 yuan; 2) hard alloy products achieved revenue of 0.388 billion yuan, an increase of 17.92% year over year; sales volume was 1,197 tons, with an average price of 0.324 million yuan/ton.

In the 2024Q3 quarter, the company achieved revenue of 0.316 billion yuan, up 16.08% year on year and 0.08% month on month; net profit to mother was 0.03 billion yuan, down 41.85% year on year and 1.67% month on month. The month-on-month decline in profit in a single quarter was mainly due to a decline in gross margin due to partial production capacity not being fully saturated, and an increase in expense ratios during the period.

Profitability is under pressure. The gross profit margin and net margin for the first three quarters of 2024 decreased by 6.71 and 9.83 pct, respectively. Looking at profitability, the company's gross sales margin and net profit margin for the first three quarters of 2024 were about 25.83% and 10.00%, respectively, down 6.71 and 9.83 pct year on year, respectively. By business, the gross profit margin for CNC tools in the first three quarters of 2024 was 34.2%, of which the gross margin for self-produced CNC blades was about 42%; the gross profit margin for hard alloy products was 16.2%.

The company's gross sales margin and net profit for the 2024Q3 single quarter were about 25.26% and 9.31%, respectively, down 7.07 and 9.50 pcts year on year, and 1.77 and 0.28 pct month on month, respectively. The decline in profitability is mainly due to rising unit costs due to unsaturated production capacity, low gross margin at the beginning of production of new products, and an increase in expenses during the period.

On the cost side, the company's expense ratio for the first three quarters of 2024 was about 14.67%, an increase of 2.89pct year-on-year. Among them, sales, management, finance, and R&D expense ratios changed +0.03, -0.19, +1.52, and +1.52pct, respectively. The increase in financial expenses is mainly due to a sharp rise in interest expenses and a decline in interest income; the increase in R&D expenses is mainly due to an increase in R&D investment in new product R&D projects. The 2024Q3 cost rate for a single quarter was about 13.83%, up 2.63 pcts year on year and down 1.36 pcts month over month.

The domestic manufacturing boom cycle is rising at the bottom, and overseas expansion+turnkey business promotes growth 1) Overseas expansion: The company seizes export opportunities and increases overseas development efforts. The company plans to establish subsidiaries in Europe, further expand overseas sales channels and overseas influence through permanent overseas offices, and further improve its overseas layout. Overseas market revenue for the first three quarters of 2024 was 0.166 billion yuan, up 44.2% year over year. Among them, the export revenue of CNC tools is about 0.14 billion yuan, and the product structure shows a high-end development trend.

2) End customer development: ① Oukeyi brand stores cover small and medium-sized customers; ② Selci brand stores cover medium-sized customers to serve customers with overall tool configuration requirements; ③ launch a turnkey solution for large customers with complete package and on-site tool management needs.

Profit forecasting and valuation

Net profit due to mother for 2024-2026 is expected to be 0.121, 0.189, and 0.276 billion, down 27% year over year, up 56%, up 46%, and CAGR = 51%. The corresponding PE is 27, 17, and 12 times, maintaining the “buy” rating.

Risk warning: 1) The recovery of the manufacturing industry fell short of expectations; 2) the domestic competition pattern deteriorated; 3) Overseas market development progress fell short of expectations.