Incident: Recently, the company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved revenue of 1.265 billion yuan, +43.36% year over year; realized net profit of 0.31 billion yuan, +29.51% year over year; realized deducted non-net profit of 0.298 billion yuan, +29.01% year over year. Looking at a single quarter, in Q3 2024, the company achieved revenue of 0.449 billion yuan, +39.13% year over month; realized net profit of 0.11 billion yuan, +19.92% year on year, -3.35% month on month; realized deducted non-net profit of 0.107 billion yuan, +24.19% year on year and -0.44% month on month.

The revenue structure changed to a slight decrease in gross margin, a decrease in exchange earnings and an increase in amortization, and an increase in expense ratios. The company's 24Q1-Q3 gross profit margin was 46.45%, -1.53 pct year on year, 25.39% year on year, and -3.02 pct year on year. This is mainly due to the rapid growth in equipment, which led to a decline in the share of high-margin ink business. However, looking at a single quarter, the company's 24Q3 gross profit margin was 47.57%, -1.20pct year on year, +1.56pct month-on-month. There was some recovery. The net profit margin was 25.29%, -4.23pct yoy, and -1.03pct month-on-month. In terms of cost ratio, the company's expense ratio for the 2024Q1-3 period was 17.49%, +2.22pct year-on-year. Among them, the sales/management/finance/R&D expense ratio was 6.52%/6.17%/-1.07%/5.87%, -1.73pct/+0.11pct/+4.61pct/-0.77pct year-on-year.

Among them, the financial expense ratio changed the most, mainly due to the year-on-year decrease in exchange earnings. Furthermore, the management expense ratio increased slightly due to the increase in depreciation and amortization expenses. If the effects of exchange rates and amortization are excluded, the company's expense ratio is properly controlled.

The transformation of digital printing in the home textile industry is accelerating, and the downstream customers of the company's Singlepass products continue to expand. On October 8, Honghua Mathematics signed a tripartite strategic cooperation agreement with Interstate Digital and Dongshen Industrial. The signing of this cooperation marks the trumpet of digital printing transformation in the home textile industry. Through innovation in digital printing technology, the home textile industry will be able to achieve flexibility, reduce inventory, enhance market competitiveness, and at the same time satisfy consumers' pursuit of high-quality and personalized products. According to the cooperation agreement, the three parties will strengthen cooperation and collaborative development in fields such as the innovative application of digital printing technology, Honghua Digital's latest generation Singlepass, and the digital intelligence upgrade of the home textile industry. According to the Interstate Digital Plan, Interstate Digital plans to expand the Singlepass production line from one to ten units within the next two years to build an intelligent digital printing factory with a daily output of 2 million meters. This strategic layout will provide a strong demonstration and guidance for the digital transformation of the entire home textile industry, and is expected to drive Honghua Digital to expand its business in the home textile field.

Pay attention to the extension and layout of the industrial chain, and production capacity construction is progressing steadily. Up to now, the company has completed the plant infrastructure work for the “Intelligent Production Line with an Annual Output of 3,520 Sets of Industrial Digital Printing Equipment” project to issue shares to specific targets. In the second half of the year, the company will strive to speed up the follow-up construction of the fund-raising project, and strive to complete the selection, installation and commissioning of the equipment in the second half of the year, so that the fund-raising project can be completed and put into operation as soon as possible. With the gradual completion and commissioning of the fund-raising project, the company will build an intelligent production plant with an area of about 0.26 million square meters and expand production capacity to about 5,520 units, making it the world's largest digital printing equipment production base. Furthermore, in order to effectively open up the company's entire digital printing industry chain, promote the company's efficiency, reduce costs, and enhance competitiveness, the company's inkjet printing industry integrated base project has officially started in the Nangang Industrial Zone in the Tianjin Economic Development Zone. The project has an investment of about 0.6 billion yuan. It is planned to be completed and put into operation in 2025. It will build an integrated inkjet printing industry production line with an annual output of 0.047 million tons of digital inkjet ink and 200 industrial digital printers.

Investment advice: The company is deeply involved in the field of digital printing, has outstanding product competitiveness, and has a complete business model from equipment sales to follow-up services. Coupled with the continuous growth in domestic and foreign market demand, future development can be expected. We expect the company's revenue for 2024-2026 to be 1.694/2.22/2.809 billion yuan, up 34.64%/31.08%/26.51% year on year; net profit to mother 0.434/0.555/0.678 billion yuan, year-on-year growth rate of 33.44%/27.96%/22.16%, EPS of 2.42/3.10/3.78 yuan respectively, corresponding PE is 29/22/18 times, maintaining the “gain” rating.

Risk warning: macroeconomic downturn risk; industry competition increases risk; overseas market risk; digital printing equipment core raw material nozzles mainly rely on outsourcing risk; risk of exchange rate fluctuations.