Event: The company released its semi-annual report for 2023. In the first half of the year, the company achieved operating income of 904 million yuan, an increase of 33.70% over the previous year; realized net profit of 167 million yuan, an increase of 68.31% over the previous year. In addition, the company plans to distribute a cash dividend of 2.00 yuan for every 10 shares to all shareholders.

Domestic and foreign sales have increased simultaneously, and energy-saving pumps have continued to rise. Q2 achieved revenue of 542 million yuan in a single quarter, an increase of 29.76% over the previous year; net profit from the parent group was 107 million yuan, an increase of 46.79% over the previous year.

By business, the company's civilian pumps/household shielded pumps/industrial shielded pumps achieved revenue of 305, 390 million yuan, and 130 million yuan respectively in the first half of the year, with a year-on-year ratio of +11%, +64%, and +47%. Liquid-cooled pumps achieved revenue of 200 million yuan in the first half of the year, an increase of more than 80% over the previous year. Segmenting the household shielded pump sector, domestic demand has recovered markedly, and overseas market share continues to rise. The company sold more than 750,000 units of energy-saving pumps in the first half of the year, an increase of nearly 200% over the previous year. According to application scenarios, from January to July 2023, sales of household shielded pumps with heat pumps sold about 154,900 units in the first half of the year, with a year-on-year growth rate of over 50%.

The gross margin has increased dramatically, and the sales expenses ratio has increased a lot. The gross margin of 2023H1 was 33.13%, +5.69 pct year on year, and net margin was 18.28%, +3.60 pct year on year. Q2 The company's gross margin for a single quarter was 33.22%, +4.37 pct year on year, and net margin was 19.47%, +2.05pct year on year. The company's sharp increase in gross margin in the first half of the year was partly due to the increase in revenue share of high-margin businesses such as industrial pumps; at the same time, benefiting from its rich and mature product reserves, the company quickly accepted demand for high-end products after the supply and demand pattern in some new markets changed, and the sales structure of the household shielded pump sector continued to be optimized.

In terms of cost rates, H1's sales, management, and R&D expenses in '23 were 4.42%, 5.42%, and 4.42%, respectively, +1.17, -0.35, and +0.73 pct, respectively; single Q2 sales, management, and R&D expense rates were 4.43%, 5.17%, and 3.69%, respectively, +1.08, +0.38, and +0.58 pct.

Steady operations and rapid inventory turnover. 1) As of '23, H1's total cash+other current assets were $916 million, +118.92%; total notes and accounts receivable were $370 million, +35.01%; company inventory was 374 million yuan, +10.83%; and total notes and accounts payable were 299 million yuan, +28.61%. 2) Judging from the turnover situation, the number of inventory turnover days at the end of the company's H1 period in '23 was -8.35 days year over year, and the number of accounts receivable turnover days was -2.62 days year over year. 3) The net operating cash flow of H1 Company in '23 was 130 million yuan, +103.13%, and the net operating cash flow in Q23 was $12 million, or -78.57% year-on-year.

Profit forecast and investment rating: We expect the company's revenue for 23-25 to be 21.08/26.24/32.47 billion, respectively, +25.6%/+24.5%/+23.7%, respectively; net profit of 349/4.51/586 million yuan, +34.0%/+29.1%/+30.0%, respectively, with a corresponding PE of 11.72/9.08/6.98 times. Maintain a “buy” rating.

Risk factors: fluctuating raw material prices, product promotion falling short of expectations, market demand falling short of expectations, increased competition in the industry, etc.