Incident: Sanhua Intelligent Control announced the 2024 three-quarter report. The company achieved revenue of 20.56 billion yuan in the first three quarters, YoY +8.4%; realized net profit of 2.3 billion yuan, YoY +6.6%; after conversion, Q3 achieved revenue of 6.89 billion yuan, YoY +6.8% in a single quarter; realized net profit of 0.79 billion yuan and YoY +3.0%. We believe that the Q3 Sanhua cold distribution business grew rapidly, the auto parts business performed steadily, and operated steadily in a single quarter.

Q3 refrigeration parts revenue grew rapidly: Q3 Sanhua Refrigeration and air conditioning electrical parts revenue increased by about 12% year on year, and the growth rate accelerated compared to Q2. Since the end of August, “trade-in” subsidy rules for home appliances in various provinces and cities have been implemented one after another, effectively boosting the consumption of air conditioners, which in turn has led to a recovery in demand for upstream components. According to industry online data, sales of Sanhua stop valves, four-way valves, and electronic expansion valves were YoY +41.9%, +22.2%, and +25.0% in September, which is a marked improvement over the sales growth rate in July and August. We believe that as the subsidy policy continues to gain strength, the revenue of Sanhua refrigeration components is expected to continue to rise in the future.

Q3 Auto Zero's business performance was stable: Q3 Sanhua Auto Parts revenue was basically flat year over year.

Sanhua is a leading global thermal management company for new energy vehicles. It continues to improve its global layout, and the revenue growth rate of the auto parts business is expected to pick up in the future.

Q3's profitability declined year-on-year: Q3 Sanhua's net profit margin was +11.4%, or -0.4pct year over year. The company's net profit margin declined year-on-year, mainly due to: 1) Due to rising raw material prices and exchange rate fluctuations, Q3 gross margin was -2.6 pct year over year. 2) The Q3 management fee rate was +1.4pct year over year. Looking ahead, profitability is expected to continue to increase as the company's revenue scale expands.

Q3 operating cash flow increased year-on-year: Sanhua Q3 net operating cash flow was 0.83 billion yuan, YoY +29.0%. The company's operating cash flow situation improved year-on-year, mainly due to the increase in revenue scale and increased cash repayment capacity. In Q3, the YoY of cash received from sales of goods and services was +13.3%, and the revenue ratio reached 100.8%, or +5.7pct year over year.

Proposed issuance of H shares to advance the global strategy: According to the company's announcement, due to changes in internal and external circumstances, the company decided to stop issuing GDR overseas. The board of directors agreed that the company will study and verify the company's overseas issuance of securities (H shares), and that the proposed issuance scale shall not exceed 10% of the total share capital after issuance. We believe that the company continues to advance its globalization strategy, and the issuance of H shares is expected to enhance its international brand image and overall competitiveness.

Investment advice: Sanhua Intelligent Control is a global leader in refrigeration control components and thermal management system control components for new energy vehicles. The company continues to expand high-potential fields such as robots and energy storage, and revenue performance is expected to increase rapidly. We expect the company's EPS to be 0.86/1.03/1.18 yuan from 2024 to 2026, maintain the buy-A investment rating, and give the company a PE valuation of 30x in 2024, which is equivalent to a six-month target price of 25.86 yuan.

Risk warning: RMB appreciates sharply, raw materials prices rise sharply, foreign trade environment deteriorates