Incident Overview: The company announced its 2024 semi-annual performance forecast. 24H1 expects revenue of around 3.188 billion yuan, down about 5% year on year; net profit to mother is expected to be 5-7.5 million yuan, down 41.73% to 61.17% year on year; after deducting non-net profit loss of 18.5-19 million yuan, down 557.4% to 569.76% year on year. The company's 24H1 performance is under pressure. We believe it is mainly due to weak demand for downstream real estate, and the decline in product revenue and profit side, which is highly correlated with real estate demand; the completed housing area in January-May was 0.222 billion square meters year on year, -20.1% year over year.

Improved gross margin, reduced raw material prices and improved internal control efficiency were both supported. The company's 24Q1 gross margin was about 30.4%, up 0.3 pct year on year; the overall gross margin of 24H1 is expected to continue to rise, mainly because the raw material stainless steel price 24H1 is in a low position. According to Wind data, the average price of 24H1 is 0.0173 million/ton, down 14.07% year on year. At the lowest price in April to 0.0164 million/ton, the price of stainless steel dropped significantly; aluminum alloy and zinc alloy rose slightly year on year The average price of aluminum alloy 24H1 was 0.0284 million yuan/ton, up 4.96% year on year; the average price of zinc alloy 24H1 was 0.0229 million yuan/ton, up 0.9% year on year; in terms of raw materials, the decline in stainless steel prices contributed greatly to the gross margin of the product; in addition, the company increased internal efficiency improvements. According to the company's annual report, all employees promoted eight major waste improvement activities. The company's gross margin increased further; costs remained stable during the company period, and profitability was steady, moderate to upward.

Expanding production capacity supports the expansion needs of new categories and scenarios. Currently, the company is expanding three projects, namely the North China production base in Henan, the third factory in Dongguan headquarters, and the Zhongshan Xiaolan production base. By the end of 2023, the construction progress of the project was 22.48%/9.34%/5.25%, respectively; according to the company's customs activity record, the Henan North China base mainly has an engineering industrial layout and has been partially put into operation; the third factory at the Dongguan headquarters is a smart home and smart security product manufacturing project, which is currently in the infrastructure stage; the Zhongshan Xiaolan project is mainly its core products, such as mechanical locks, smart companies, shower rooms and lighting industries; Products and new products have formed a large-scale and obvious brand effect in the industry, expanding production bases to get rid of production capacity restrictions and leveraging the company's one-stop procurement needs. In terms of expanding new scenarios, according to the company's annual report, the company expanded from previous residential buildings to new application scenarios such as hotels, schools, hospitals, factories, and rail transit; the new scenarios are generally small B customers. We believe that the development of small B customers is very effective in hedging the pressure brought about by the incremental decline in real estate. Furthermore, the cash flow repayment quality for small B customers is high, and the company can optimize the customer structure through the expansion of new scenarios to reduce business risks and maintain steady operation.

Overseas markets have maintained high growth, and there is room for future growth. The company's overseas markets are mainly concentrated in emerging market countries related to the “Belt and Road”. According to the company's annual report, the model is to replicate the “Chinese warehousing style” overseas; the products have now been sold to more than 100 countries and regions, and the influence in overseas markets is gradually increasing; currently, the company's overseas market is relatively small. According to the company's customs investment activity record table and semi-annual performance forecast, the 24Q1 overseas market's contribution to the company's overall net profit increased year-on-year. 24H1 overseas market is expected to become a new business growth pole in the future.

Investment advice

Based on delays in the implementation of the real estate policy, we lowered our profit forecast. We expect the 2024-2025 operating income forecast to be 8.682/10.006 billion yuan (originally 9.73/11.475 billion yuan), and the estimated net profit to mother is 0.341/0.42 billion yuan (original 0.56/0.673 billion yuan), corresponding EPS is 1.06/1.31 yuan (originally 1.74/2.09 yuan); additional 2026 operating income/net profit to mother/EPS The forecast is 11.446 billion yuan/0.522 billions/1.62 yuan, respectively; corresponding to the stock price of 23.01 yuan on July 10, 21.71/17.61/14.18xPE. Maintain a “buy” rating.

Risk warning

Demand falls short of expectations, construction costs are higher than expected, new business and channel expansion falls short of expectations, systemic risks.