JL Mag Has Mixed Q3, With One-Offs Offsetting Weak Margin; Reducing FVE to HKD 29

Narrow-moat JL Mag reported mixed quarterly results. While third-quarter net profit was up 70% year over year to CNY 223 million, at the midpoint of company’s preliminary results, gross margin for the quarter was weaker than expected. The fact that the first nine months net profit accounted for 77% of our full-year forecast but gross margin missed indicates the quarterly profit was lifted by one-off items. We cut our 2022-24 revenue estimates by 5%-10% and net profit forecasts by 0%-14%. We lower our fair value estimate to HKD 29.00 (CNY 26.50) from HKD 36.00 (CNY 30.50). Our fair value implies a 2023 P/E ratio of 24 times, which is justified by 31% 2021-24 net profit CAGR. At the current price, H-shares are trading at 21% discount to our fair value, which is attractive, in our view. The A-shares, at 34% premium to its H-shares, are fairly valued.