3Q24 results slightly lower than our expectations

The company announced 1-3Q24 results: revenue of 490 million yuan, +17% year-on-year; The net profit attributable to the parent company was 76.51 million yuan, a year-on-year increase of +2.7%. In the third quarter alone, the company achieved revenue of 180 million yuan, a year-on-year increase of -0.24%; The net profit attributable to the parent company was 22.27 million yuan, a year-on-year increase of -39.7%, in the third quarter alone, the industry demand was slightly under pressure, and the company's Xinjinquan Huizhou factory was put into production and climbed to cause short-term losses, and the performance in the third quarter was slightly lower than our expectations.

In terms of business, 1) superhard tools: with the recovery of downstream demand such as consumer electronics, and the volume of new products such as ball cage milling cutters, we expect to be the main source of power for the company's revenue; 2) Tungsten carbide tools: We expect revenue and gross margin to increase to a certain extent; 3) Supermaterials: We expect this business to be slightly pressured by downstream demand. The

proportion of products with high gross profit margin increased, and profitability increased slightly. 1-3Q24 The company's gross profit margin was +0.7ppt year-on-year to 44.8%, which we believe is mainly due to the loss reduction of new businesses such as cemented carbide tools and the increase in the proportion of high-gross margin varieties of superhard tools. 1-3Q24 The company's sales/management/R&D/financial expense ratio was +0.4/-0.3/-0.6/+1ppt year-on-year to 10.5%/9.6%/7.3%/0.1% respectively, and the overall cost control ability was stable.

Development trend The

incubation period of new business is gradually passing, and the volume of new products is worth looking forward to. 1) The drag of new business is gradually decreasing: According to the company's third quarter report, the lab-grown diamond and cemented carbide CNC blade business has achieved steady growth, and the loss has gradually decreased under the scale effect in the third quarter, approaching breakeven, and we expect that the pressure on profits caused by the two new businesses may gradually decrease in 2025; 2) New products continue to bring power: the company continues to promote the research and development of superhard tools for automobiles, humanoid robots, consumer electronics and other industries, among which, new products such as planetary roller milling cutters, ball cage milling cutters, and solid tools continue to be recognized by major customers, which is the company's iterative growth momentum.

Earnings Forecast and Valuation

Considering that the industry prosperity in 2024Q3 is slightly lower than expected and the short-term net profit pressure caused by the ramp-up of new production capacity, we lower our 2024 profit forecast by 15.8% to RMB120 million, and maintain the 2025 profit forecast of RMB170 million unchanged, with the current stock price corresponding to 2024-2025 P/E of 25.4/17.2x, respectively. Considering the recent increase in the valuation center of the sector, we switch the valuation to 2025, corresponding to an increase in the target price of 22.2% to 22 yuan, corresponding to a P/E of 19x in 2025, and the current stock price has room for 11.4%, maintaining the "outperform" rating.

Risks

Downstream demand such as automobiles is less than expected, the promotion of new products is less than expected, and the expenditure during the new business investment period is large.