1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 1.179 billion yuan, -21% YoY, net profit to mother of 72.38 million yuan, or -42% YoY. 2Q24 revenue was 0.658 billion yuan, -23% year over year, and net profit to mother was 30.5 million yuan, -60% year over year. 1H24's profit fell short of our expectations, mainly due to gross margin pressure exceeding our expectations.

1) Demand from the main business was under pressure, and revenue declined year-on-year. According to the Bureau of Statistics, 1H24's national cement production was about 0.85 billion tons, or -10% year-on-year. The revenue of 1H24's technical services/new admixture materials business was 0.154 billion yuan/0.878 billion yuan respectively, -20%/-20% compared to the same period. Against the backdrop of downstream demand being blocked, the main business revenue was under significant downward pressure.

2) The admixture industry is fiercely competitive, and gross margin has declined. 1H24's consolidated gross margin was about 23.4%, -1.7ppt year over year. Among them, the gross profit margin of the main admixture new materials business was 20.3%, -4.4ppt; the 2Q24 company's gross margin was about 21.7%, -3.3ppt year over year, and -2.5ppt month-on-month, and overall gross margin was under pressure.

3) Technical service business performance has improved markedly, and competitiveness is strong. The gross profit margin of 1H24's technical service business was 38.0%, +3.6ppt; the company's wholly-owned subsidiary Jianyan Testing had revenue of 96.96 million yuan in the first half of the year, a slight increase over the previous year, with net profit of 21.44 million yuan, +119% year-on-year. The company's technical service business still maintains strong competitiveness and cost control capabilities, and the benefits are steady, moderate and positive.

4) The cost rate has increased. 1H24's sales/management/finance expense ratio was +1.2ppt/+0.3ppt year-on-year. Against the backdrop of high overall downward pressure on revenue, there is limited room for cost pressure reduction.

5) There is some pressure on repayments, and operating cash flow is clearly under pressure. 1H24's net operating cash flow was -74.34 million yuan, compared to +62.01 million yuan in the same period last year. Affected by weak downstream demand and scarce capital in the industry chain, the company was under great pressure to repay in the first half of the year.

Development trends

Industry sentiment is expected to recover in the second half of the year, and the company's performance is expected to bottom out. In the first half of the year, as real estate demand was still in a downward channel and the physical infrastructure workload could not be fully implemented due to lack of project capital, the company's main business adjuvants were under great downward pressure on the demand side, which also had an obvious impact on the sales repayment schedule.

Looking ahead to the second half of the year, we believe that as financial support such as special bonds and special treasury bonds are gradually put in place, and financial strength is expected to be strengthened, downstream demand is expected to gradually recover, leading to a recovery in the company's additive sales, which is expected to support the company's sales of adjuvants and drive the recovery of the company's revenue and profit.

Profit forecasting and valuation

We maintain the 2024/25E net profit of 0.162 billion yuan/0.182 billion yuan unchanged, and the current stock price corresponds to 2024/25E 15.6x/13.9x P/E. We maintain our outperforming industry rating and maintain a target price of 5.0 yuan, corresponding to 2024/25E 21.5x/19.2x P/E, implying 38% upside.

risks

Demand recovery fell short of expectations, and industry competition intensified.