Market demand for the testing business declined, and the results of the first three quarters were under pressure in the short term. The company released its report for the third quarter of 2024. The company achieved revenue of 1.96 billion yuan in the first three quarters of 2024, a year-on-year decrease of 5.4%; net profit to mother was 0.16 billion yuan, a year-on-year decrease of 36.1%. Looking at a single quarter, 2024Q3 achieved revenue of 0.66 billion yuan, a year-on-year decrease of 0.1%; realized net profit to mother of 0.05 billion yuan, a year-on-year decrease of 28.2%.

The main reason for the decline in the company's performance is 1) due to the decline in market demand in some infrastructure sectors, and the company's inspection and testing business revenue and profit declined to a certain extent; 2) Participating companies were affected by falling prices in the lithium battery industry, and the iron phosphate business, a precursor to cathode materials, experienced losses and reduced investment income (0.03 billion yuan less than the same period last year).

Operating cash flow has been greatly improved, and expenses have been properly managed. The company achieved a gross margin of 22.4% (yoy-3.7pct) in the first three quarters of 2024. The company achieved a sales expense ratio of 2.5% (yoy-0.1pct) in the first three quarters of 2024; a management expense ratio of 5.5% (yoy-0.1pct); a financial expense ratio of -0.2% (yoy-0.1pct), mainly due to an increase in interest income; and a R&D expense ratio of 5.0% (yoy+0.1pct). Net operating cash flow of 0.22 billion yuan was achieved in the first three quarters, with a year-on-year increase of 0.3 billion yuan in net inflows, mainly due to increased accounts receivable settlement and receipt of bank note discounts.

Strict “two financial” controls to improve the quality of operations. Facing a severe and complex internal and external environment, the company comprehensively strengthened risk management and actively carried out customer restructuring. In the future, the company will further integrate and collaborate with internal and external resources to further improve market development efforts and capacity utilization; focus on the main business to increase scientific and technological innovation, do a good job of forging long boards to make up shortcomings, and play an important role in superior industries; actively promote “two gold” pressure reduction efforts, continuously improve operating cash flow, and improve business quality.

Benefiting from Baowu's entry, the magnetic materials business can be expected to grow. As of 2024Q2, the company has 0.05 million tons of electronic grade manganese tetroxide/0.025 million ton battery grade manganese tetroxide/0.02 million ton permanent magnet ferrite devices/5,000 tons of soft magnetic devices/4000 tons of metal powder core/2000 tons of rare earth permanent magnetic devices/0.07 million tons of metal products. Benefiting from the increase in demand for new manganese materials, the company has already expanded 0.01 million tons of battery-grade manganese tetroxide and is expected to be completed and put into operation in October . After Baowu becomes the indirect controlling shareholder of the company, the company is expected to share excellent management mechanisms, scientific and technological achievements and capital with Baowu, and benefit from the majority shareholder background to obtain upstream resource endowments and become a first-tier magnetic material supplier. The internal integration process is worth looking forward to.

Investment advice: Affected by the performance losses of participating companies, the 24-year performance forecast has been lowered. We expect to achieve revenue of 2.91/3.52/4.25 billion yuan and net profit of 0.3/0.38/0.46 billion yuan in 2024-2026, corresponding PE of 18.4/14.4/11.9x. The company has a good incentive system for the testing business, and the magnetic materials business is enjoying the growth of the industry. It is expected to maintain high revenue and profit growth in the future and maintain a “buy” rating.

Risk warning: The growth rate of downstream demand for magnetic materials falls short of expectations, testing business development falls short of expectations, risk of fluctuations in raw material prices, etc.