Longruan Technologies announced 3Q23 earnings results. The Company achieved revenue of Rmb252mn in 1-3Q23 (+18.23% YoY), and attributable net profit (ANP) of Rmb63.7873mn (+25.14% YoY). It posted revenue of Rmb113mn (+15.18% YoY) in 3Q23 along, with ANP at Rmb25.6413mn (+14.44% YoY). Driven by policy promotion and downstream demand, we are optimistic about the long-term development potential in the smart mining sector. According to Longruan Technologies' 3Q23 earnings, we tweak the Company's 2023E-25E EPS forecasts to Rmb1.35/1.96/2.60 and revise our target price to Rmb50. We reiterate the "BUY" rating.

Earnings growth slightly disappointed, while profit margins remain at a relatively high level.

In 1-3Q23, Longruan Technologies posted revenue of Rmb252mn (+18.23% YoY), with gross profit margin (GPM) at 56.74% (+2.15ppts YoY), and ANP at Rmb63.7873mn (+25.14% YoY), with net profit margin (NPM) at 25.29% (+1.37ppts YoY). It recorded revenue of Rmb113mn (+15.18% YoY) in 3Q23　along, with GPM at 55.56% (+0.88ppts YoY), and ANP of Rmb25.6413mn (+14.44% YoY), with NPM at 22.68% (-0.21ppts YoY). The Company's overall earnings in 3Q23 were slightly below expectations, while its GPM somewhat picked up, with NPM remaining at highs.

Continuous policy support secures high certainty of industry development.

We see high visibility of development in the smart mining sector. In recent years, we have witnessed frequent rollouts of policies and guidance opinions related to the intelligent transformation of smart mining. On Sep 6, 2023, the Central Office of the Communist Party of China (CPC) Central Committee and the State Council issued the opinions on further strengthening mine safety production work, which clearly pointed out promoting the mechanized upgrades of small- and medium-sized mines and the automation and intelligent upgrades of large-scale mines, accelerating the intelligent construction of mines with serious disasters and high altitudes, and creating a number of automated and intelligent benchmark mines. We believe that the support for smart mines at the policy level may accelerate the trend of intelligent upgrades of mines and bring sustainable development opportunities to relevant companies.

Attractive valuation brings investment value to the fore.

After share price corrections, the share price of Longruan Technologies closed at Rmb37.83 on Oct 25, 2023, corresponding to 30.41x PE (TTM), which is at the 1.1th percentile of the past three years and is at a transitorily low level. We see high visibility of secular industry development for Longruan Technologies driven by policy promotion and downstream demand, and the Company is also likely to benefit from this on the back of its core geographic information system (GIS) technology advantages, securing long-term investment value.

Potential risks:

A decline in revenue due to lower-than-expected capex of downstream customers; a drop in GPM due to increased market competition; the　development of smart mines missing expectations; technological innovation falling short of expectations; the Company's project construction progress failing expectations; bad debts in the Company's accounts receivable; the introduction and promotion of policies not up to expectations; disappointing development of smart cities, etc.

Investment recommendation:

We believe that the domestic smart coal mining industry is likely to maintain good prosperity under the dual catalysis of actual demand and active policy promotion. The Company has technical advantages in the GIS field and project experience in smart coal mines, which may fully benefit from industry development going forward. According to the Company's 3Q23 earnings results, we tweak the Company's 2023E-25E EPS forecasts to Rmb1.35/1.96/2.60, corresponding to 28x/19x/15x PE based on the current share price. With the comps valuation for Bestway Intelligent Control (301195.SZ), Mas Sci & Tech (300275.SZ) and Supermap Software (300036.SZ) averaged at 20x 2024E PE as a reference (the valuation of Mas Sci & Tech is based on Wind consensus estimates, while the valuations of the other two are based on CITICS Research forecast), and considering Longruan Technologies’ in-depth presence buildup in smart coal mines and its robust earnings growth, we assign 25x PE to derive a target price of Rmb50 and reiterate the "BUY" rating.