2024 results in line with our expectations; 1Q25 results miss Luyang Energy-Saving Materials (Luyang) announced its 2024 and 1Q25 results. In 2024, revenue rose 0.4% YoY to Rmb3.53bn, attributable net profit fell 2.4% YoY to Rmb480mn, and recurring net profit dropped 7% YoY to about Rmb486mn, largely in line with our expectations. In 1Q25, revenue fell 22.6% YoY to Rmb542mn, attributable net profit fell 27% YoY to Rmb60.04mn, and recurring net profit fell 28% to Rmb58.75mn, slightly missing our expectations due to sharper-than-expected declines in revenue and gross margin.

1) Ceramic fiber sales volume remained stable; profit per tonne declined slightly. In 2024, the firm's sales volume of ceramic fiber stood at 540,000t (YoY growth largely flat), and its ASP rose 3% YoY to Rmb5,978/t due to changes in product mix. In 2024, the firm’s ceramic fiber revenue rose 3% to Rmb3.2bn, but gross margin fell 2ppt YoY to 32.1% due to intensified competition, with per-tonne gross profit dropping Rmb66 YoY to Rmb1,918. The firm’s blended gross margin fell 0.4ppt YoY to 30.6% (excluding tax and surcharges).

2) New businesses under adjustment. Industrial filtration and automotive gaskets contributed revenue of Rmb160mn and Rmb142mn to the firm in 2024, implying gross margins of 10.9% and 14.1%. We think the new businesses still weighed on the firm’s net profit in 2024.

3) Expenses declined thanks to continued adjustment to management and operations. The firm's overall expense ratio fell 2ppt YoY to 13.1% in 2024, with selling, G&A, and R&D expenses falling 1.6%, 11.3%, and 38.7% YoY.

4) Net margin declined slightly. In 2024, operating profit rose 5.4% YoY to Rmb585mn, with operating profit margin rising 0.8ppt YoY to 16.6%. However, net margin fell 0.4ppt YoY to 13.6% in 2024, as income tax rate rose 5.3ppt YoY to 17%.

5) Strong cash flow. Cash-to-revenue ratio rose 2ppt YoY to 91% in 2024, and operating cash flow rose Rmb234mn YoY to Rmb564mn (up 71% YoY).

6) Dividend payments remained high. The firm declared a dividend of Rmb0.8/sh, implying a payout ratio of 86%. Current stock price implies a dividend yield of over 6%.

1Q25: 1) Revenue and gross margin under pressure: In 1Q25, revenue fell 23% YoY, and gross margin fell 3.5ppt YoY to 25.6%. 2) Expenses dropped and net margin still under pressure: In 1Q25, the firm’s selling, G&A, and R&D expenses dropped 30%, 6%, and 83% YoY, with the overall expense ratio down 3ppt YoY. The firm’s net margin dropped 0.7ppt YoY to 11.1%. 3) Liability-to-asset ratio fell 5.6ppt QoQ to 20.9%.

Trends to watch

Developing emerging industries to fend off downside risks in traditional industries. Looking ahead, we think demand from traditional industries will likely come under pressure due to ample new production capacity in the market. However, we think the firm's ceramic fiber business will likely grow steadily on its efforts to expand into new fields and introduce new technologies from major shareholders.

Financials and valuation

As demand is under pressure, we lower our 2025 net profit forecast 5.5% to Rmb493mn and introduce our 2026 net profit forecast of Rmb552mn. The stock is trading at 12.6x 2025e and 11.3x 2026e P/E. We maintain an OUTPERFORM rating and, given rising risk appetite, we keep our TP unchanged at Rmb13.5, implying 14x 2025e and 13x 2026e P/E and offering 11% upside.

Risks

Technology leaks; disappointing demand for ceramic fiber and/or integration of new businesses.