Event: the company released its quarterly report for 2023 on October 25. 1~3Q23 achieved revenue of 400 million yuan, YoY- 23.0%; return to its mother net profit 245 million yuan, YoY- 23.5%; deduction of non-net profit 210 million yuan, YoY-29.0%. The performance was slightly lower than market expectations, mainly because the company was affected by the slowdown in the overall demand pace of the industry, but we noticed that the company's R & D expenses increased significantly by 195% compared with the same period last year, and the company continued to speed up the research and development of new products to consolidate the market's first-mover advantage. at the same time, the construction of the third phase of the project will greatly increase the company's production capacity.

There are periodic fluctuations in performance affected by demand, and profitability remains at a high level. 1) in a single quarter:

3Q23 realized revenue of 84 million yuan, YoY-58.8%; net profit of 36 million yuan, YoY-73.7%; deduction of non-net profit of 26 million yuan, YoY-79.1%. 2) profitability: 3Q23 gross profit margin fell 9.4ppt to 68.5% compared with the same period last year, and net profit margin dropped 24.0ppt to 42.5% compared with the same period last year. In the first three quarters of 2023, gross profit margin rose to 75.7% year-on-year; net margin fell 0.4ppt to 61.3% year-on-year.

Speed up the research and development of new products; the net cash flow of business activities increased significantly compared with the same period last year. During the 1~3Q23 period, the expense rate increased by 17.1ppt to 24.8% compared with the same period last year. 1) the sales expense rate decreased from 0.02ppt to 0.7%; 2) the management expense rate increased from 2.7ppt to 6.5%; 3) the financial expense rate was-1.1%, compared with-1.8% in the same period last year. 4) the R & D expense rate increased from 13.7ppt to 18.5% year-on-year; R & D expenses increased by 194.7% to 74 million yuan. By the end of 3Q23, the company: 1) accounts receivable and bills 565 million yuan, an increase of 0.7% over the end of 2Q23; 2) prepayments of 3 million yuan, a decrease of 16.8% compared with the end of 2Q23; 3) inventory of 92 million yuan, an increase of 71.1% over the end of 2Q23; 4) a contract liability of 240000 yuan, an increase of 17.9% over the end of 2Q23.

The net cash flow of 1~3Q23 's operating activities was 682 million yuan, compared with 2 million yuan in the same period last year.

The third phase of the project will greatly increase production capacity and continue to consolidate the market's first-mover advantage. 1) fixed increase capacity growth: in 2022, the company will raise an additional 2 billion yuan mainly for the construction of high-performance carbon fiber and fabric product projects. in the company's existing land and new land construction of polyacrylonitrile precursor production line, oxidation carbonization line, carbon fiber fabric workshop and related supporting implementation, with an annual production capacity of 1500 tons (12K) of high-performance carbon fiber and fabric products. The project is currently in the stage of process commissioning and trial production and is expected to reach the scheduled state of use on December 31, 2025. (2) obvious first-mover advantage: the company's ZT7 series carbon fiber products have been applied in a stable batch in the aviation and aerospace fields for many years, and the new generation of carbon fiber represented by ZT9H has also been verified in multiple scenarios in different application fields, with smooth progress and multi-directional and multi-echelon layout of new products. In the future, the application of multi-series carbon fibers such as ZT7, ZT8 and ZT9 in different fields is expected to be further expanded.

Investment advice: the company is China's high-end carbon fiber national "specialized special new" small giant, customer stickiness and strong downstream demand certainty. The implementation of equity incentive in 2022 will help to improve the governance structure and accelerate the release of business vitality. The company will speed up the construction of the third phase of the project, turn the technological R & D advantage into production capacity advantage, and further improve the core competitiveness. We take into account the demand pace adjusted profit forecast, the company is expected to return to the net profit of 627 million yuan, 778 million yuan and 912 million yuan in 2023-2025, respectively, and the current stock price corresponds to the 22x/17x/15x of PE in 2023-2025. We maintain the "recommended" rating, taking into account the room for capacity release.

Risk tips: downstream demand is lower than expected, capacity release is not as expected, and so on.