Matters:

The company achieved operating income of 5.381 billion yuan (YoY +31.05%); net profit to mother of 1.603 billion yuan (YoY +40.38%); non-net profit of 1.437 billion yuan (YoY +63.66%); and gross profit margin of 42.77% (YoY +2.99pcts) in the third quarter of 2024. 2024Q3 achieved operating income of 1.953 billion yuan (YoY +32.29%, QoQ +4.81%); net profit of 0.578 billion yuan (YoY +40.59%, QoQ -2.50%); deducted non-net profit of 0.524 billion yuan (YoY +69.56%, QoQ -2.22%); gross profit margin of 44.30% (YoY +4.42pcts, QoQ+0.93pcts).

Commentary:

Performance was in line with expectations, and foreign exchange dragged down performance slightly. Q3 revenue continued to grow month-on-month, with a gross profit margin of 44.3%, and continued to increase 0.93 pcts month-on-month. We estimate that it is mainly driven by high-margin businesses such as MLCC and plug-in, especially high demand for plug-in downstream data centers. On the profit side, the main reason is that financial expenses were affected by exchange, which increased month-on-month, and the reduction in government subsidies caused a slight drag.

Looking ahead to 25 years, MLCC/ferrule is expected to lead the company's steady growth. AI servers and end-side innovation are expected to drive MLCC into a new growth cycle. The company is actively increasing its share with high-capacity technology and cost leadership. MLCC products are already widely used in mobile communications, smart terminals, new energy and other industries. Downstream home appliances with traditional advantages are expected to recover under the impetus of trade-in. In the future, along with higher yield rates and higher self-control rates, gross margin is expected to continue to increase. PKG business companies are actively expanding their share with cost advantages, and gross revenue margin is expected to return to growth as demand recovers. The plug-in business is expected to recover steadily, driven by investment in AI computing power.

The new business layout can be expected, and material capacity is being built up and underdeveloped. With its deep accumulation in the field of ceramic materials, the company is actively developing new products. Medical ceramic parts, optical communication tube shells and semiconductor components are expected to become the driving force for future growth. The company's 400G high-speed optical communication tube shell products have passed customer certification and continue to develop ceramic-metal packaging cases with good high frequency performance, reliability and air tightness. The semiconductor parts business is expected to open up full new space in the context of localization of equipment components.

Profit forecast and investment suggestions: The Sanhuan Group's product hierarchy has improved mature, growing and emerging business layouts, advanced materials platforms have been built, and there is still huge room for growth against leading Japanese manufacturer Murata Kyocera. The company has fully proven its excellent management level and product competitiveness. Currently, passive components represented by MLCC have bottomed out and rebounded. Judging from multiple indicators of time span, channel inventory, and product price, the inflection point in the industry cycle has been established. Considering industry recovery and the company's business performance, we adjusted the company's 24-26 EPS forecast from 1.17/1.47/1.68 yuan to 1.12/1.47/1.68 yuan, combined with the company's own business strategy, with reference to comparable company valuations such as China Porcelain Electronics/Fenghua Hi-Tech. Combined with the company's high historical average valuation and profit flexibility, we gave a 25-year 30X target valuation. The price was adjusted to 44.1 yuan, maintaining the “strong recommendation” rating.

Risk warning: Technology research and development falls short of expectations, production expansion falls short of expectations, and downstream demand falls short of expectations.