24H1 net profit to mother fell 135.73% year on year, maintaining a “buy” rating

New Leineng released its semi-annual report. In 2024, H1 achieved revenue of 0.489 billion yuan (yoy -44.93%) and net profit of 68.0445 million yuan (yoy -135.73%). We expect the company's net profit for 2024-2026 to be 0.029/0.19/0.296 billion yuan respectively (previous value was 0.173/0.24/0.304 billion yuan). The reason for the reduction was that demand expectations in the downstream military industry were weak, while the company's R&D investment remained high. Since the military industry has been affected by various external factors over the past 24 years, the company's performance has declined significantly. We recommend valuing the company by referring to the company's 25-year performance. Comparatively, the company's 25-year Wind unanimously expected an average PE value of 36 times, giving the company 36 times PE in 25 years, with a target price of 12.60 yuan (previous value of 9.28 yuan), maintaining a “buy” rating.

Industry demand and orders were weak, and business performance in the second quarter increased significantly from month to month

The first half of the year was affected by fluctuating orders in the company's industry and insufficient market demand. However, on a quarterly basis, the company's second-quarter results have clearly recovered. Q2 achieved revenue of 0.289 billion yuan (yoy -25.90%, qoq +44.62%), and net profit to mother of 29.4793 million yuan (yoy -138.45%, qoq +23.56%). Currently, equipment construction is at the end of the mid-14th Five-Year Plan adjustment, and subsequent downstream demand and orders are quite flexible. In terms of gross margin, the company's overall gross margin level in the first half of the year was 42.88%, down 7.19 pcts from the same period last year. The main reason was that some of the company's military products had price cuts. At the same time, the share of military product revenue decreased, but the gross margin situation had improved from the first quarter, up 6.25 pcts from month to month.

Continued high investment in R&D, significant improvement in cash flow from operating activities

The 24H1 company's expense ratio for the period was 57.40%, an increase of 34.17pct over the same period last year; of these, the sales expense ratio was 5.49%, up 2.03 pcts from the same period in '23. The management cost ratio was 11.36%, up 5.61 pcts from the same period last year; the R&D expenses rate was 39.22%, up 22.12 pcts from the same period last year, and R&D expenses increased 26.28% year on year. Cash flow from operating activities was 0.032 billion yuan compared to -0.18 billion yuan in the same period last year, showing a marked improvement.

The product spectrum continues to improve, and domestic production capabilities bring opportunities to increase market share. Currently, the company has full-process capabilities from one power conversion to three changes in the military industry, and the variety of products in the traditional communication and data center fields is also constantly being enriched. In recent years, the company has continued to develop high-reliability localized models by combining self-developed control and driver chip capabilities with localization support capabilities. The newly developed module power supplies are all 100% localized, which can replace module power products from leading foreign technology companies. Currently, the competitive pattern in the special power supply industry is scattered, and some small manufacturers will be eliminated due to the shortened new product development cycle and weak ability to penetrate the localization rate, etc., and the company is expected to increase its market share with a rich product spectrum and strong R&D capability/localization capabilities.

Risk warning: The company's military business orders fall short of expectations, and the risk of fluctuations in product gross margin.