3Q24 results exceeded our expectations

GETO New Materials announced its 3Q24 results: In 1-3Q24, revenue rose 13% YoY to Rmb1.8bn; attributable net profit grew significantly to Rmb59.33mn; and recurring net profit rose 204% YoY to Rmb33.14mn. In 3Q24, revenue grew 16% YoY to Rmb671mn, attributable net profit achieved a turnaround to Rmb51.76mn, and recurring net profit rose 198% YoY to Rmb45.94mn, beating our and market expectations, mainly due to QoQ GM expansion and falling financial expenses in 3Q24.

1) Steady revenue growth: Revenue continued to grow over 15% YoY in 3Q24, mainly because the firm's overseas revenue maintained rapid growth (equity incentive target exceeded Rmb500mn in 2024 vs. only Rmb367mn in 2023).

2) GM rose QoQ in 3Q24: GM grew 3.5ppt QoQ and 9.5ppt YoY to 29.7% as the firm actively explored overseas high-GM markets, and its efforts to reduce costs and improve efficiency paid off.

3) Expense ratios fell, and net margin rose: The expense ratio fell 6.6ppt YoY to 15.4% in 3Q24, with selling, G&A, R&D, and financial expense ratios falling 1.8ppt, 1ppt, 1.2ppt, and 2.5ppt YoY to 5.4%, 4.4%, 4.7%, and 0.9% (financial expense ratio fell due to the large amount of FX gains in 3Q24). In 3Q24, credit impairment loss fell 56% YoY to Rmb13.09mn, driving the 3Q24 net margin up 13.8ppt YoY to 7.7% (+4ppt QoQ).

4) Cash flow improved substantially: In 1-3Q24, the firm's cash-to- revenue ratio rose 8ppt YoY to 86.3% (93% in 3Q24 vs. 76% in 3Q23; cash collected reached Rmb651mn, a quarterly record high), which we attribute to strengthened payment collection and high-quality payment collection from overseas businesses. Net operating cash flow reached +Rmb1.74mn in 1-3Q24 (net cash flow was Rmb151mn in 3Q24 vs. - Rmb92.77mn in 3Q23).

Trends to watch

Equity incentive plan shows confidence in growth. On September 24, the firm announced its 2024 stock option incentive plan, proposing to grant 8mn stock options (about 3.25% of the total equity base) to 191 core employees at an exercise price of Rmb8.10/sh. The assessment requirements of the incentive plan are that the firm's net profit should be no less than Rmb80mn, Rmb200mn, and Rmb300mn in 2024-2026, and its overseas revenue should not be less than Rmb500mn, Rmb1.0bn, and Rmb1.5bn (implying YoY growth of 36%, 100%, and 50%). We believe the incentive plan shows the firm's confidence in its overseas business and may also motivate management.

Financials and valuation

We raise our 2024 and 2025 net profit forecasts 53% and 73% to Rmb81mn and Rmb205mn as 1) the firm plans to change its accounting estimates, which will affect depreciation policies and reduce depreciation costs in 4Q24 and following years, and 2) the development of its high-GM overseas businesses is accelerating. The stock is trading at 37x 2024e and 15x 2025e P/E. We maintain an OUTPERFORM rating. Given the rising risk appetite in the market, we raise our target price 67% to Rmb15 (45x 2024e and 18x 2025e P/E), offering 23% upside.

Risks

Overseas business expansion disappoints; demand continues to drop; accounts receivable and bad debts rise.