The third quarter results fell short of expectations: the company's third-quarter revenue/net profit to mother was 1.795 billion/32.5 million yuan (RMB, same below), down 2.2%/78.6% year on year, down 11.2%/550.8% month on month, lower than our expectations, mainly due to the slow recovery of high gross margin European household storage shipments. At the same time, the company's household systems and mainland household grid-connected inverter sales have had a certain impact. The gross margin for the third quarter was 23.4%, down 7.8/month-on-month, and up 3.3 percentage points, respectively, mainly due to changes in revenue structure. Sales/ management/ R&D/ finance expense ratios were 7.5%/4.3%/7.1%/0.6%, respectively, +0.8/+0.6/+0.2/-0.6 percentage points year over year, net interest rate 2.9%, down 5.9/month over month, up 1.7 percentage points.

Inverter exports to Europe have been repeated in the short term, but the long-term growth trend has not changed, and performance can still be expected to recover from quarter to quarter:

After continuing to recover from month to month, China's inverter exports to Europe fell 7%/24% year over month respectively in September. We believe that the month-on-month decline may be affected by short-term factors such as typhoons and European vacations.

As Europe enters a cycle of interest rate cuts and the energy transition continues to advance, the trend of long-term growth in demand has not changed. Exports are expected to resume month-on-month growth from October, and the company's performance for the fourth quarter and next year can still be expected to recover quarterly.

Downgraded to neutral: Due to lower performance than expected, we reduced our 2024-26 profit by 71%/21%/20% to 0.148/0.603/0.79 billion yuan. Due to the significant increase in the overall valuation of the market, we raised our valuation benchmark from 18 times the 2025 price-earnings ratio to 23 times (still at the bottom since listing in 2020), maintaining a target price of 57.10 yuan. We believe that profit recovery in 2025 is highly certain, but there is still great uncertainty about the extent of recovery. Further increases in valuation are yet to be realized, and the rating will be downgraded from buying to neutral.