The company released the 2024 semi-annual report: 24H1 revenue of 0.669 billion yuan (YoY -5.7%), net profit of 0.203 billion yuan (YoY -9.1%), net profit of 0.195 billion yuan (YoY -10.7%); 24Q2 revenue 0.354 billion yuan (-6.7% YoY), net profit to mother 0.102 billion yuan (YoY -17.2%), net profit not attributable to mother 0.097 billion yuan (YoY- 20.0%) The year-on-year decline in revenue was mainly due to a high base, a rise in new production capacity & new products, and steady month-on-month improvement; profit pressure was mainly due to increased investment in R&D expenses and a high exchange base.

The share of independent brands continues to rise, and the profitability of domestic and foreign sales is increasing. 24H1 OBM/ODM achieved revenue of 0.433/0.19 billion yuan respectively (+2.3%/-27.5% YoY), and OBM accounted for nearly 70% (63% in 23); the slight pressure on ODM was mainly due to a high 23H1 base. By region, export/domestic sales revenue was 0.594/0.074 billion yuan (-7.9%/+16.7% year-on-year, respectively), and gross margin was 53.8%/36.3% (52.2%/32.9%, respectively, in 23 years). Domestic and foreign sales profitability increased year on year. It is expected that the continued release of new products will help the average price continue to rise.

Product iteration is accelerating, and new production capacity is climbing steadily. Benefiting from the commissioning of new production capacity in 2023, the company's output increased to nearly 0.09 million units. It is expected that the 24H1 increase in production capacity will accelerate the decline. 24H1 has increased investment in R&D and accelerated product promotion (various differentiated new products will be released at the Guangzhou International Performing Arts Equipment Exhibition in 2024). It is expected that new product delivery will continue to improve as new production capacity climbs and production efficiency increases. In addition, lighting equipment usually accounts for only 8% of overseas performance costs, and downstream price sensitivity is weak. If tariffs are imposed in the future, the company's price transmission capacity is strong and the tariff risk is manageable.

Gross margin has been steadily improving, and expenditure investment has accelerated. The gross margin for 2024Q2 was 51.1% (+1.4pct year over year), and the net profit margin to mother was 29.0% ((-3.7 pct year over year)). In terms of cost performance, the cost rate during 2024Q2 was 17.2% (+7.9pct year on year), with sales/R&D/management/finance expenses rates of 7.9%/5.4%/7.8%/-4.0% ((+0.4/+2.0/+2.3/+3.2pct), respectively. We expect cost fluctuations to be mainly due to 1) the company increasing investment in R&D, 2) optimizing employee benefits and deepening talent bonding, and 3) the exchange base is high.

Stable cash flow & operating capacity. 2024Q2's net operating cash flow was 0.162 billion yuan (-0.007 billion yuan year over year). In terms of operating capacity, as of 2024Q2, the number of days receivable, payable, and inventory turnover was 66.26/63.06/117.43 days respectively (+20.79/+7.95/-20.05 days compared to the previous year).

Profit forecast: The net profit for 2024-2026 is expected to be 0.43, 0.51, and 0.6 billion yuan, respectively. The corresponding PE valuations are 11.7X, 9.8X, and 8.3X, respectively, maintaining the “buy” rating.

Risk warning: The recovery in global demand falls short of expectations, the rise in production capacity falls short of expectations, and intensification of global trade frictions.