3Q24 results are in line with our expectations

The company announced results for the 1st to 3Q24: revenue of 1.123 billion yuan, -36.1% YoY; net profit to mother -0.234 billion yuan, -322.2% YoY. Single 3Q24 results: revenue of 0.395 billion yuan, -30.8% year on year; net profit to mother -0.063 billion yuan, which turned negative year on year. The performance is in line with our expectations and that of the market.

Development trends

Revenue during the adjustment period may be under pressure, or greatly affected by the life sciences sector. The 3Q24 company's revenue scale has declined a lot. We determine that the life sciences sector (especially food) is mainly due to the decline in order amounts due to downstream sentiment, corporate customer restructuring, base relocation, and market price competition; at the same time, automobiles and other consumer goods are also under pressure on the price side.

Rigid costs dragged down profitability, and cost control improved month-on-month. The gross margin of the 3Q24 company was 26.6%, -14.95pct year-on-year, and -7.99pct month-on-month. We judge that this was mainly due to the decline in revenue scale and the rigidity of costs. 3Q24's sales/management/R&D/finance expense ratios were 17.8%/13.9%/9.0%/0.5%, +1.47/+0.48/+2.06/+0.47pct year over year, and -2.60/-3.12/-2.28/+0.14pct, respectively. We judge that the company actively controlled costs and results during the business adjustment period.

Active pressure reduces government exposure+debt conversion expectations, and impairment losses and operating cash flow are expected to be repaired. The company's government customers account for a relatively large share, and the pressure is being actively reduced this year; at the same time, the Ministry of Finance recently stated that it will increase its debt reduction efforts. We believe that with the introduction of relevant measures in the future, the company is expected to benefit from improved repayments and bad debts.

The 3Q24 company accrued credit impairment losses of 10.62 million yuan, accounting for 2.69% of revenue. There has been a significant improvement over the previous month, and the cash flow from operating activities was -31.42 million yuan, which has not yet been corrected.

Profit forecasting and valuation

As the company is in the business adjustment period this year, we lowered our 2024 net profit from 6.18 million yuan to -212.59 million yuan, leaving the 2025 profit forecast unchanged for the time being. The current stock price corresponds to 20.8 times the price-earnings ratio in 2025. Maintaining an outperforming industry rating, but due to the upward trend in the overall valuation center of the industry, we raised our target price by 20% to 9.00 yuan, which corresponds to 23.0 times the price-earnings ratio of 2025. There is 10.4% room for growth compared to the current stock price.

risks

Downstream demand falls short of expectations; investment project implementation risks.