Cost reduction and efficiency were comprehensively promoted, and the company's 1H24 net profit to mother doubled year-on-year. 1H24 achieved net profit of 1.85 to 0.235 billion yuan (YoY +117.47% ~ 176.25%), and realized net profit of 0.195 billion yuan to 0.245 billion yuan (YoY +142.24% ~ 204.35%). Corresponds to 2Q24's net profit of 1.12 to 0.162 billion yuan (YoY +314.81% ~ 500%, QoQ +53.42% ~ 121.92%); achieved net profit of 1.22 to 0.172 billion yuan YoY (+238.89% to 377.78%, QoQ +67.12% to 135.62%). The main reasons for the sharp increase in performance are: 1) the recovery of the downstream economy, the recovery in the overall operating rate of the industry, and steady growth in the company's production and sales; 2) Since 2024, the company has further optimized its medium- to long-term development strategy, comprehensively promoted special tasks such as extreme cost reduction, efficient innovation, emerging market development, and digital transformation, improving management and control efficiency and reducing operating costs.

The downstream economy has recovered, and MLCC has entered an upward cycle. Since 2023, the downstream terminal market has continued to recover, and demand in application sectors such as communications and home appliances has picked up, while emerging application fields such as new energy vehicles, industrial control, energy storage, AI, and the low-altitude economy have continued to expand. In recent years, the company has continued to promote the development of high-end application products such as vehicle specifications, medium and high voltage, and high capacity. In 1Q24, the company's automotive electronics and high-end communications customer shipments continued to increase, and breakthroughs were achieved in order delivery for new customers. In addition, the company continues to expand production, investing in the construction of the “High-end Capacitor Base Project in Xianghe Industrial Park”, the “Technical Improvement and Production Expansion Project for Additional Chip Resistors with a Monthly Output of 28 Billion”, the “Technology Improvement and Production Expansion Project for New Integrated Inductors with a Monthly Output of 0.1 billion”, and the “Technology Improvement and Production Expansion Project for New Multilayer Inductors with a Monthly Output of 4 billion.”

A new chairman has arrived, and cost reduction and efficiency have continued to be optimized. In February 2024, the board of directors of the company elected Mr. Li Cheng as the chairman of the 9th board of directors of the company. Mr. Li Cheng was the former president of Guoxing Optoelectronics. He has accumulated deep experience in the field of electronics manufacturing, bringing low-cost strategies and lean culture construction to Fenghua, and has adopted the ultimate cost-reduction mindset and methodology throughout the entire process. Reduce material costs by strengthening procurement cost management, self-production of key materials, etc.; carry out in-depth lean diagnosis to completely eliminate redundant waste and explore improvement potential in depth; strengthen cost management, strictly control various unproductive expenses, and maximize the space for cost reduction and efficiency in all aspects.

Investment advice: Maintain an “better than the market” rating.

As demand in downstream consumption, communications, home appliances and other sectors recovers, the company's cost reduction and efficiency continue to advance, and the company's profitability is recovering significantly. We expect the company's 2024-2026 revenue to increase 30.9%/18.2%/15.9% year on year to 5.53/6.53/7.57 billion yuan, and net profit to mother will increase 132.1%/44.1%/27.7% year on year to 0.4/0.58/0.74 billion yuan, corresponding to 2024-2026 PE 40/28/22 times, respectively , maintaining an “superior to the market” rating.

Risk warning: downstream demand falls short of expectations; the company's cost reduction and efficiency fall short of expectations; the company's production expansion falls short of expectations.