Suochen Technology released its three-quarter report. In Q1-Q3 of 2024, revenue of 0.083 billion yuan (yoy +58.23%), net profit to mother of -70.6472 million yuan (year-on-year increase in loss), deducted non-net profit of -75.2318 million yuan (year-on-year increase in loss).

Among them, Q3 achieved revenue of 31.1011 million yuan (yoy +0.75%, qoq +56.39%) and net profit of -4.2164 million yuan (year-on-year loss, month-on-month loss). 24Q1-Q3's revenue growth rate is relatively fast year-on-year, mainly due to rapid revenue growth in simulation product development business; net profit to mother increased year-on-year losses, and gross margin is expected to decrease mainly due to changes in revenue structure. We believe that epitaxial mergers and acquisitions+civil market expansion may drive the company's rapid revenue growth. Maintain a “buy” rating.

Changes in business structure are dragging down gross profit margins and are expected to pick up throughout the year

The overall gross margin of the 24Q1-Q3 company was 42.63%, a year-on-year change of -23.50pct. The year-on-year decline in gross margin is expected to increase mainly due to the increase in revenue from simulation product development business with lower gross margin. We expect 24Q4 to gradually confirm revenue as the engineering simulation software business with a high gross margin gradually confirms revenue, and gross margin is expected to pick up.

The acquisition of WIPL-D software source code is expected to further enhance multidisciplinary capabilities. According to the company's official account, on October 9, 2024, the company officially signed an agreement with WIPL-D d.o.o. to acquire a full set of source codes for WIPL-D software products, becoming the sole owner of WIPL-D software products in the Asia-Pacific region. WIPL-D is a 3D full-wave electromagnetic simulation design product suite developed based on the High Order Moment Method (HOMOM). It can be widely used in many scenarios such as electromagnetic compatibility (EMC), complex target radar scattering cross section (RCS) analysis, and antenna array design. We believe that as a domestic CAE leader, the company is expected to continue to integrate domestic and foreign industrial resources, and continue to strengthen its multidisciplinary product capabilities.

The expansion of the civilian market is expected to help accelerate revenue in 25 years

According to the company's official account, on May 23, 2024, the company signed a strategic cooperation agreement with the Guangzhou Automobile Group Co., Ltd. Automotive Engineering Research Institute. The company can provide the GAC Research Institute with advanced technical support in the fields of structural analysis, collision simulation, fluid dynamics, and multi-body dynamics. On August 26, the company signed a strategic cooperation agreement with Yitong Drone Systems Co., Ltd., and the two sides will develop long-term cooperation on key technology research and development for large-scale unmanned transport aircraft. Potential application areas include structural analysis, thermal design evaluation, flight dynamics simulation, and battery performance simulation. We believe that as the company continues to expand the civilian CAE market, growth space is expected to gradually open up, and revenue growth may accelerate in 25 years.

Profit forecasting and valuation

Maintaining the profit forecast, the company's 24-26 revenue is expected to be 0.456, 0.629, and 0.836 billion yuan, while EPS is 0.89, 1.33, and 1.95 yuan, respectively. Comparable to the company's average 25E 17.3x PS. Considering that the CAE industry has lower entry barriers than the EDA industry and the company's short-term gross margin is declining, 25E 10x PS was given due to prudential considerations, corresponding to a target price of 70.55 yuan (previous value 76.40 yuan), maintaining a “buy” rating.

Risk warning: macroeconomic fluctuations, downstream demand falls short of expectations.