The company released its 2024 interim report, and the performance greatly exceeded expectations

In the first half of 2024, the company achieved revenue of 0.41 billion yuan, +14.9% year-on-year, and realized net profit to mother of 71.94 million yuan, or +15.3% year-on-year. Looking at the second quarter alone, the company achieved revenue of 0.24 billion yuan, +16.2% YoY, +41.1% month-on-month; realized net profit to mother of 54.75 million yuan, +43.1% YoY, +218.5%. The company's Q2 results surpassed market expectations.

Deepening the expansion of domestic and foreign markets, CNC blade sales increased markedly in the first half of 2024. The company continued to develop new products and step up efforts to expand domestic and foreign markets. According to the company's August 13 customs activity record, 2024H1's domestic market revenue was 0.39 billion yuan, +13.6% year over year; overseas market revenue was 23.04 million yuan, +43% year over year, the growth rate is fast, and overseas markets are expected to become an important incremental contributor market.

Product upgrades, gross margin remained stable; scale effect, net margin increased year-on-year

In the first half of 2024, the company's comprehensive gross margin was 42.6%, the year-on-year -2.2pp, the period expense ratio was 20.6%, year-on-year -2.9pp; the net interest rate was 17.5%, +0.1pp. In the 2nd quarter of a single quarter, the company's comprehensive gross margin was 46.4%, +1.9pp year on month; the Q2 company's expense ratio was 18.3%, -3.2pp year on year, the year-on-year reduction was mainly due to increased scale effects and reduced amortization of equity incentive expenses; Q2, the company's net margin was 22.8%, +4.3pp year on year, and +12.7pp month-on-month.

The price war worsened, and profitability was falsified in stages. The valuation needed to be repaired. Since the second half of 2022, the market has been worried that the decline in macro demand and the release of industry production capacity will cause the supply of CNC blades to exceed demand, triggering a price war, and ultimately leading to a deterioration in the profitability of tool companies. In terms of actual performance, there is indeed price pressure on low-end products, but the price pressure on middle and high-end products is less. Industry leaders such as Huarui Precision have basically maintained the gross margin of CNC blades in the 48-50% range through product upgrades. Therefore, we believe that concerns about the worsening profitability of the price war in the blade industry have been falsified in stages, so there is room for repair in valuations mistaken due to concerns.

Investment advice

We expect the company's 2024-2026 revenue to be 9.7, 11.6, and 1.44 billion yuan, respectively, +22%, +19%, and +24%. The 2024-2026 net profit will be 1.9, 2.4, and 320 million yuan, respectively, +20%, +29%, and +31%. EPS for 2024-2026 will be 3.06, 3.95 and 5.15 yuan, respectively, and the 2024/8/20 stock price of 42.79 yuan corresponds to 14, 11 and 8 times PE. The company is a leading domestic CNC tool enterprise. The domestic cycle is bottoming up, overseas expansion efforts are increasing, and there is plenty of room for growth. First coverage, giving a “buy” rating.

Risk warning

The risk of macroeconomic fluctuations, the risk of exports falling short of expectations, the risk of fluctuations in raw material prices, and increased risk of industry competition.