Investment Summary

Stable Q3 Results with Continued Improvement in Gross Margin
According to the recently released Q3 2025 report, the Company recorded revenue of RMB32.37 million (RMB, the same below) for the first three quarters, down 7.38% yoy. Net profit attributable to the parent company reached RMB287 million, up 7.54% yoy, and net profit attributable to the parent company excluding non-recurring items was RMB304 million, up 16.66% yoy.

Operating costs for the first three quarters dropped 12.78% yoy to RMB24.03 million, a steeper decline than the drop in revenue, mainly driven by optimisation of product mix and cost control. This contributed to a 4.6 ppts increase in gross margin to 25.8%. The overall period expense ratio rose by 2.06 ppts to 14.94%, with the selling expense ratio up 0.64 ppts yoy and the administration expenses ratio up 1.11 ppts yoy. Financial expenses decreased by 31.2% yoy, benefiting from increased exchange gains. The R&D expense ratio rose slightly by 0.55 ppts to 6.7%. Asset impairment losses narrowed by 38.1% yoy, mainly due to a reduction in provision for inventory write-down. Profit growth was primarily driven by continued cost optimisation, partly offset by the rise in period expense ratio. Net profit margin attributable to the parent company increased by 1.23 ppts yoy to 8.86%.

Looking at the quarterly data, Q3 revenue was RMB10.76 million, down 4.68% yoy. Net profit attributable to the parent company was RMB76,301.6 thousand, down 7.9% yoy. Net profit attributable to the parent company excluding non-recurring items was RMB86 million, up 0.38% yoy. Compared to Q2, revenue/net profit attributable to the parent company/net profit attributable to the parent company excluding non-recurring items were up 2.28%, down 13.09%, down 9.34% qoq, respectively. Profitability continued to improve in Q3, with gross margin up 0.84 ppts yoy to 26.28%. The period expense ratio rose slightly by 0.45 ppts yoy, and operating profit margin increased by 1 ppt yoy to 8.9%. However, a sharp increase in non-operating expenses due to losses on disposal of fixed assets, along with a higher effective tax rate, significantly impacted profitability, resulting in a 0.25 ppts yoy decline in net profit margin attributable to the parent company to 7.09%.

Overseas Business and Capacity Adjustment

In terms of market layout, the Company continues to deepen its presence in the domestic market while enhancing its share in international markets through optimisation of overseas channels. The increase in exchange gains indirectly reflects the scale of overseas business settlements. Notably, construction in progress at the end of the reporting period decreased by 50.21% compared with the beginning of the period, mainly due to the transfer of Longtai Auto Parts's project to fixed assets, suggesting that capacity restructuring may provide support for future market expansion.

Breakthrough in Liquid Cooling Technology and Entry into the Humanoid Robot Supply Chain

During the period, the Company achieved significant technological breakthroughs. Its liquid cooling pipeline system gained strong market recognition driven by surging AI computing power demand, further reinforcing its leading technological advantage. The Company successfully introduced its joint module into the supply chain of humanoid robots, marking a substantive advancement in the application of thermal management technology in frontier industries. In addition, the Company continues to promote the integration of its thermal management technology with emerging fields such as robotics, accelerating its deployment in the humanoid robot market and striving to establish a long-term growth engine aimed at fostering new productive forces.

Investment Thesis

With the rising penetration of new energy vehicles and increasing demand for liquid-cooled servers, the Company's dual-track strategy of "automotive + general industrial" is expected to continue unlocking result potential. The increase in expense ratio during the market development phase, does not undermine its long-term growth potential.

As for valuation, we revised diluted EPS of the Company to RMB 0.73/0.96/1.16 of 2025/2026/2027. And we accordingly gave the target price to RMB23.2, respectively 31.8/24.1/20x P/E for 2025/2026/2027. "Neutral" rating. (Closing price as at 30 October)

Historical P/E Band

Source: Wind, Company, Phillip Securities Hong Kong Research

Risk

1) Progress of new production line is below expectations;
2) Electric vehicle sales fall short of expectations;
3) Macroeconomic downturn affects product demand;
4) Sharply rising raw material prices or sharply falling product prices.

Financials

(Closing price as at 30 October 2025)

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