1H24 results are in line with our expectations

The company announced the interim report: 1H24 achieved revenue of 1.06 billion yuan, +44% year over year; net profit to mother was 0.103 billion yuan, +44% year over year; net profit without return to mother was 95.65 million yuan, +62% year over year. Corresponding to 2Q24, revenue was 0.495 billion yuan, +25% year over month, -13% month on month; net profit to mother was 50.64 million yuan, +61% year on month, -4% month on month; net profit without return to mother was 44.49 million yuan, +67% year over month, and -13% month on month. The 1H24 results were in line with our expectations.

Development trends

Hybrid emissions increased EGR revenue, and high-quality pure electric customers helped increase iron core revenue. Looking at 1H24 by business: 1) EGR system business revenue +43% YoY to 0.35 billion yuan, gross margin +0.4pct YoY to 24.5%. The China Automobile Association showed that 1H24 hybrid passenger car sales volume was +85.2% to 1.92 million units. The company provided hybrid EGR such as BYD, Geely, and Chery to enjoy industry dividends. 2) The precision parts business revenue was +15% to 0.24 billion yuan, and the gross margin was +1.3 pct to 24.3% year over year, entering multiple systems fields such as drive/electronic control, passive safety, and chassis. 3) Revenue from the new energy business was +77% to 0.46 billion yuan, and gross margin was +0.3 pct to 11.9% year over year. The China Automobile Association showed that 1H24 pure electric passenger car sales volume was +11.6% to 3.02 million vehicles; the company entered high-quality supply chains such as leading North American electric vehicle companies, United Electronics, Star Drive, BYD, and Jinkang Power to provide drive motor core products for best-selling pure electric models.

Profit margins and expense ratios remained stable, and cash flow improved. The gross margin/net profit margin/sales/management/R&D/finance expense ratios of 1H24 were 19.0%/9.7%/1.3%/3.2%/3.7%/1.3%, respectively, +0.0/-0.1/-0.4/-0.1/+0.2pct, and +2.0/+2.9/+0.2/-0.6/-0.0pct, respectively, and remained stable overall. The overall increase in gross margin was slightly lower than expected. We believe that the EGR and motor cores for hybrid passenger cars are in the phase of capital expenditure expansion and production capacity climbing. 1H24's operating cash flow was +192% year-on-year to 0.13 billion yuan, exceeding the net profit level for the same period, and the quality of cash flow improved.

Expand the main business and open up a long-term growth curve. Looking ahead: 1) The company has gradually achieved small-batch production of EGR for Weichai Power 13/15/17L natural gas engines in 2Q24, which is expected to expand heavy truck customers; we are optimistic that the company will enjoy the market space brought by hybrid volume with its first-mover advantage. 2) The company has expanded the number of mainstream pure electric vehicle customers. We are optimistic about the production volume and revenue of motor core products driven by the cycle of high-quality models such as BYD, Qianjie, Geely, and Xiaomi. 3) In addition, the company actively lays out aerospace business, and its holding subsidiary Microresearch Zhongjia lays out precision parts for aerospace and drones. 1H24 signed a strategic cooperation agreement with Galaxy Aerospace, and the two sides reached a cooperation agreement on the production and processing of core precision components such as satellite energy modules, communication modules, and control modules.

Profit forecasting and valuation

The profit forecast for 2024/2025 remains unchanged. The current stock price corresponds to 18.0x/13.7x 2024E/2025EP/E multiples. Maintaining a target price of 20.75 yuan, corresponding to the 21.0x/15.9x 2024e/2025e P/E multiples, there is 16.4% upside compared to the current stock price.

risks

Production capacity in the new energy business fell short of expectations, commercial vehicle production and sales fell short of expectations, and industry competition intensified.