Incident: On July 29, 2024, the company released the “2024 Semi-Annual Report”. 1H2024 achieved operating income of 0.512 billion yuan, +2.86% year over year, net profit to mother of 35.4529 million yuan, +0.44% year on year, deducted non-net profit of 34.5671 million yuan, +1.27% year on year, and business performance increased steadily.

Results improved in the second quarter, and profit levels increased steadily. Looking at 2Q2024 alone, the company achieved revenue of 0.271 billion yuan, +2.74% YoY, +12.78% month-on-month; realized net profit to mother of 20.0601 million yuan, +8.51% YoY, +30.32% month-on-month, and realized deducted non-net profit of 19.8768 million yuan, +21.16% YoY and +35.31% month-on-month. In terms of profit margin, 2Q2024's gross sales margin was 18.59%, +0.79pct year on year, -0.09pct month-on-month, net sales margin was 7.39%, +0.39pct year on year, and +0.99pct month-on-month.

Looking at 1H2024's business by product, the steel ball business revenue was +10.49% year over year, gross margin was +2.69 pct year over year; the roller business was under pressure in the short term, revenue was -26.15% year over year, and gross margin was -2.71 pct year over year.

The ceramic ball project is progressing smoothly, and the 800V tram platform brings new opportunities. The 800V platform has gradually become the mainstream solution for electric vehicles, putting higher demands on high rotational speed/corrosion resistance/insulation of motors. Ceramic bearings may become the best choice to solve electric corrosion of bearings, and ceramic balls have great potential as their core material to replace traditional bearing steels. In 2023, the company steadily promoted the mass production process of ceramic rolling elements. It has built 2 G3 grade ceramic ball intelligent R&D production lines and 33 G5 industrial production lines (75 planned). In the future, ceramic balls will become the company's core product, which is expected to lead the replacement of domestic products.

More than 30 years of manufacturing experience have been accumulated, and a strong alliance with the Chinese Academy of Sciences. The company's bearing steel ball sales revenue has been ranked first in China for many years. Currently, it is the only domestic enterprise in China that has entered the procurement system of the top eight international bearing manufacturers. In June 2024, the company signed a strategic cooperation agreement with the Institute of Metals of the Chinese Academy of Sciences to jointly promote the localized preparation and high-precision processing of ceramic balls, provide high-quality products for high-end equipment industries such as high-end machine tools/new energy vehicles/industrial screws/humanoid robots/electrical/wind power, and strongly promote autonomous and controllable manufacturing of major equipment in China to ensure the safety and control of related industrial chains. The company continues to actively promote emerging businesses and open up space for the company's long-term growth.

Investment advice: The company is a leader in the domestic rolling element industry. It is actively increasing high-end categories such as ceramic rolling elements. There is huge room for localization and replacement, combined with the recovery in the boom in industries such as high-speed rail/wind power, and room for imagination in the field of humanoid robots, the company's performance is expected to grow steadily. The company is expected to achieve net profit of 0.089/0.128/0.179 billion yuan in 2024-2026, corresponding PE of 28.8/19.8/14.2 times, maintaining an “increase in holdings” rating.

Risk warning: risk of new product development falling short of expectations, risk of changes in trade policy, risk of foreign investment, etc.