24Q1-3 revenue was -16% YoY, net profit to mother -26% YoY, and performance was in line with market expectations. The company's 24Q1-Q3 revenue was 1.01 billion yuan, -15.9% YoY, net profit 0.15 billion yuan, or -25.7% YoY; of these, 24Q3 revenue was 0.35 billion yuan, -15.5%/-3% YoY, and net profit to mother 0.06 billion yuan, or -34.5% /9.7% YoY. 24Q1-3 gross profit margin 24.4%, -1.0 pct year on year, 14.7% net profit margin, -1.9 pct year on year, 24Q3 gross profit margin 27.8%, 1.4/6.1 pct year on month, 15.6% net profit margin to mother, and -4.5/1.8 pct year on month. Short-term demand is under pressure due to the removal of stocks in the heat pump industry, and performance is in line with market expectations.

HVAC/R: Heat pump inventories may have bottomed out, and increased policies are expected to drive a gradual recovery in demand. 1) In the heat pump sector, with a high export base and declining subsidies (German subsidies were reduced from 40% to 30% in '23), demand continued to decline, dragging down the company's performance. At present, it has been almost a year since the heat pump has been removed from storage, and the inventory level of overseas leading companies has dropped to a low level. At the same time, Germany introduced a new policy (the subsidy ratio was raised to 70%, but heat pumps produced in Germany need to be purchased. The company's products are components, and the customer is a leading European customer, which meets the requirements), and the price of superimposed natural gas continues to rise, and demand is expected to rise at the inflection point in Q4. 2) In the field of commercial air conditioning, the company has long-term stable cooperation with leading companies such as Haier and Daikin, while continuously expanding new industries (the share of data centers is expected to rise to nearly 10%). The sector is expected to grow by 0-10% throughout the year.

Thermal management for new energy vehicles: Continued investment in R&D, market share is expected to continue to increase. The company's new energy vehicle thermal management field has core products such as electric compressor inverter drives, PTC electric heating controllers and all-in-one controllers, which are widely used in many mainstream models. The company continues to increase research and development of forward-looking technologies and products. We expect that our market share will continue to increase, and the sector's revenue CAGR is expected to reach 40% in 24-26.

Business investment drives up costs and puts pressure on cash flow in the short term. The company's expenses for the 24Q1-3 period were 0.11 billion yuan, +53% YoY, and +4.9pct, of which the Q3 period cost 0.05 billion yuan, +177.5%/+36.6%, expense ratio 12.9%, YoY +9.0/+3.7pct; 24Q1-3 net operating cash flow 0.04 billion yuan, -28.9% YoY, of which Q3 operating cash flow was 0.01 billion yuan, -80.8% YoY /Correction; inventory at the end of 24Q3 was 0.3 billion yuan, +2.1% compared to the end of Q2; contract debt at the end of 24Q3 was 0.003 billion yuan, -25% compared to the end of Q2.

Profit forecast and investment rating: Considering that demand for heat pumps is still low, we lowered the company's 24-26 net profit of 0.215/0.284/0.355 billion yuan (the original value was 0.219/0.288/0.361 billion yuan), -1%/+32%/25%, corresponding to current PE prices of 25x, 19x, and 15x. Considering the long-term trend of energy efficiency improvement, the heat pump market maintains a “buy” rating.

Risk warning: macroeconomic downturn, sales of new energy vehicles falling short of expectations, heat pump storage falling short of expectations, etc.