3Q24 earnings largely in line with our expectationChanghai Composite Materials announced its 3Q24 results: Revenue fell 0.25% YoY to Rmb679mn; net profit attributable to shareholders grew 3.8% YoY to Rmb80.41mn; recurring attributable net profit fell 7.9% YoY to Rmb65.76mn (non-recurring gains and losses totaling Rmb14.65mn), largely in line with our expectation.

Sales volume of roving yarns and relevant products possibly remained largely flat QoQ; recovering prices possibly drove marginalrecovery in earnings. We think the firm's sales volume of fiberglass and fiberglass products remained flat QoQ in 3Q24. Prices of fiberglass raw yarns and finished fiberglass products both recovered in 2Q24. Data from sci99.com indicates that the firm's tax-inclusive ASP of wound direct roving products rose by Rmb102/t QoQ to Rmb3,652/t in 3Q24. We estimate that net profit per tonne of roving yarns and relevant products was about Rmb850/t in 3Q24, and the proportion of such products in total sales volume remained stable. In addition, we think falling resin prices amid weak demand affected the earnings of the firm's chemical products in 3Q24.

Financial expense ratio increased YoY due to falling FX gains. In 3Q24,the firm's overall expense ratio rose 1ppt YoY and 0.5ppt QoQ to 13.2%, mainly because its financial expense ratio rose 0.6ppt YoY and 0.9ppt QoQ to 1.3%. Based on data from the firm, falling foreign exchange (FX) gains amid USD depreciation during the reporting period led to a rise in its financial expense ratio.

The 150,000t Phase I intelligent manufacturing production line startedproduction in 3Q24. Based on data from the firm, as of June 30, 90% of the firm's 150,000t Phase I intelligent manufacturing project was completed, and 80% of the firm's "3-to-8" project was completed. Data from sci99.com shows that the firm's 150,000t Phase I intelligent manufacturing production line started production in August-September.

Net operating cash flow improved marginally; capex declined. Thefirm's net operating cash flow was Rmb287mn in 3Q24, with operating cash inflow at about Rmb736mn and operating cash outflow at about Rmb449mn. The firm's capex was Rmb167mn in 3Q24, improving marginally compared with 2Q24. During the reporting period, the firm's debt-to-asset ratio stayed low at 33%.

Trends to watch We suggest watching possible fiscal policy efforts' effect on domestic demand and demand recovery in overseas markets. Looking ahead, webelieve domestic demand for fiberglass roving products will be mainly driven by fiscal policy efforts, installation of wind power capacity, and demand from new fields. In overseas markets, we suggest watching demand recovery in Europe and the Middle East. In addition, new domestic production lines put into operation in 2H24 include: 1) Jushi's Huai'an Phase II project (0.1mnt); 2) Changhai's intelligent manufacturing production line (0.15mnt); and 3) Xingtai Jinniu's new production line (0.15mnt). We believe that the pressure from industry-wide new supply will still exist.

Financials and valuation

We keep our 2024 and 2025 EPS forecasts at Rmb0.67 and Rmb0.98. The stock is trading at 17x 2024e and 12x 2025e P/E. We maintain an OUTPERFORM rating and TP of Rmb11.8, implying 18x 2024e and 12x 2025e P/E, offering 1% upside.

Risks

Weaker-than-expected recovery in fiberglass demand; production capacity of new production lines higher than expected.