3Q24 results are in line with our expectations

The company announced the three-quarter report: 3Q24 revenue -5%/-8% YoY to 0.87 billion yuan, net profit to mother -16%/-12% YoY to 82.6 million yuan, deducting non-net profit -19%/-5% YoY to 78.06 million yuan. 1-3Q24's cumulative revenue was -6% to 2.77 billion yuan, net profit to mother -13% to 0.27 billion yuan, and after deducting non-net profit -16% to 0.25 billion yuan. The 3Q24 results were in line with our expectations.

Development trends

Revenue growth outperforms the commercial vehicle industry and expands downstream applications of crankshaft products. According to the China Automobile Association, 3Q24 commercial vehicle sales volume was -15%/-20% month-on-month to 0.824 million units, and wholesale sales in the heavy truck industry were -18%/-23% month-on-month to 0.179 million units. The company's 3Q24 revenue outperformed the industry at a month-on-month rate, mainly due to: 1) binding core customers such as Weichai, Cummins, and Shangchai to maintain a high market share; 2) expanding product categories such as large axles, passenger car crankshafts, etc., and supporting power sets, ship engines, etc. downstream of large axles. Market demand is strong, while passenger car crankshafts benefit from the hybrid trend and ushered in increased demand. We believe that the company is expected to expand the downstream application of its main product engine crankshaft through production line adjustments, technology upgrades, market development, etc., to achieve diversified revenue growth and reduce the impact of cyclical fluctuations in the heavy truck industry.

Profitability is under pressure, and operating cash flow remains steady. 3Q24's gross margin was -6.3pct/-5.2pct to 20.7% month-on-month, mainly affected by weakening scale effects, fixed cost amortization, and an increase in the share of passenger car crankshaft sales with low gross margins. The 3Q24 company's net interest rate was -1.4pct/-0.5pct to 9.5% month-on-month, and the cost ratio for the period was -1.5pct/-2.2pct to 13.3% month-on-month, and R&D and management expenses were reduced month-on-month. As of the end of 3Q24, the company had undistributed profit of 3.13 billion yuan, net cash of 0.76 billion yuan, and abundant cash; 1-3Q24 maintained a steady net operating cash flow of 0.51 billion yuan.

Policy catalysis helped domestic business, and the Thai factory progressed in an orderly manner. We expect the sales volume of the domestic heavy truck industry to increase in 4Q24 under the trade-in subsidy policy. The company is expected to benefit from the industry beta to achieve a month-on-month increase in domestic revenue, combined with the implementation of cost reduction and efficiency measures, and we are optimistic about the month-on-month improvement in the company's 4Q24 profitability. In October, the company announced that it has completed the registration procedure for the Thai factory. Considering that the company currently has sufficient crankshaft connecting rod production capacity, we expect that the company may relocate its existing domestic production line equipment to the Thai factory, thereby shortening the equipment verification cycle and reducing capital expenses. We are optimistic that the company's Thai factory is expected to be put into operation faster and contribute to the increase in overseas revenue and profit.

Profit forecasting and valuation

Due to demand recovery in the domestic commercial vehicle industry falling short of expectations, we lowered our 2024/2025 profit forecast by 6.5%/10.3% to 0.395/0.454 billion yuan. Maintain outperforming industry ratings. The current stock price corresponds to 13.9/12.1 times 2024/2025 P/E. Considering the profit forecast adjustment and the sector's valuation center moved upward, the target price remained unchanged at 5.56 yuan, corresponding to 16.1/14.0 times the 2024/2025 P/E, with 15.4% upward space compared to the current stock price.

risks

Production and sales in the commercial vehicle industry fell short of expectations, the development of emerging businesses fell short of expectations, and customer growth fell short of expectations.