Incident: On August 15, the company released its 2024 mid-year report. Net profit returned to mother increased significantly in the first half of the year. From January to June 2024, the company achieved total operating income of 0.693 billion yuan, +12.57% year on year; net profit to mother 0.095 billion yuan, +63.53% year over year; deducted non-net profit of 0.087 billion yuan, +69.05% year over year; gross sales margin of 38.90% and net sales margin of 13.75%. Among them, 2024Q2 achieved total revenue of 0.365 billion yuan in a single quarter, +6.80% YoY, +11.33%; net profit to mother of 0.061 billion yuan, +37.90% YoY, +77.64% month-on-month; deducted non-net profit of 0.056 billion yuan, +35.45% YoY, +75.65% month-on-month; gross sales margin of 41.32% in a single quarter, and a net sales margin of 16.70% in a single quarter.

The gross margin of display materials has reached 40%, and OLED screens are still an important market trend. In terms of segment segments, in the first half of 2024, the company showed that materials, pharmaceutical intermediates, electronic chemicals and other sectors achieved revenue of 0.665/0.023/0.005 billion yuan respectively. Among them, display materials were the most important source of revenue for the company, accounting for 96% of revenue in the first half of the year. Revenue increased 30% year-on-year, and gross margin reached 40%. In the first half of 2024, the boom in the consumer electronics industry picked up further, panel inventory was optimized, and upstream panel shipments and material demand increased. In particular, demand for OLED materials continued to grow steadily. The rebound in demand and the rapid development of folding screen phones drove a marked increase in smartphone shipments in the first half of the year. The year-on-year growth rate in the second quarter of 2024 was as high as 6%; in the first half of 2024, OLED smartphone shipments increased by about 43% year on year, surpassing LCD for the first time. Chinese OLED manufacturers surpassed that of South Korean manufacturers, which means that Chinese mobile phone manufacturers will have a higher voice in the field of upstream materials and equipment in the future. I am optimistic that the OLED demand side will continue to drive the company's display materials performance growth. The company's APIs have passed GMP inspection, laying the foundation for developing new businesses. On June 25, the company announced that the active ingredient posaconazole produced by Ruilian Pharmaceutical, a wholly-owned subsidiary, has passed the pharmaceutical production quality management standard compliance inspection (GMP compliance inspection) of the Shaanxi Drug Administration, indicating that Ruilian Pharmaceuticals already has the ability to produce APIs, laying the foundation for subsequent applications for GMP compliance tests for other API products and the development of the API business.

Profitability improved in the first half of the year, and the convertible bond project will further help the company's performance grow after construction.

Affected by the recovery in demand for terminal consumer electronics in the first half of 2024, the company's revenue in the display materials sector increased significantly year-on-year, which also further reflects the increasingly important role of OLED materials as high-end display panel materials in the company's operations. It is expected that with economic recovery, the improvement in downstream demand will be further transmitted to the company and drive up performance. In addition, the issuance of the company's convertible bonds continues to advance. The fund-raising projects are OLED pre-sublimation materials and high-end fine chemicals industry base projects, with an estimated average annual revenue of 0.538 billion yuan after completion.

Investment advice: Based on the recovery of the company's main downstream display panel industry leading to demand growth, the first half of the year's performance has increased markedly. Downstream sentiment is a prerequisite for the company's positive performance. We expect the company's net profit to be 0.196/0.272/0.357 billion yuan respectively in 2024-2026, corresponding to the closing price of PE on August 16, 19/13/10 times, respectively, maintaining the “recommended” rating.

Risk warning: Downstream demand recovery falls short of expectations; the company's new product verification cycle is slowing down; progress in ongoing construction is slow.