1H24 results fall short of our expectations

Furong Technology announced 1H24 results: operating income of 1.043 billion yuan, up 20% year on year; net profit to mother was 0.104 billion yuan, down 35% year on year, lower than our expectations. Corresponding to the 2Q24 single quarter, Furong achieved revenue of 0.565 billion yuan, a year-on-year increase of 26%, and net profit to mother of 0.041 billion yuan, a year-on-year decrease of 46%. We believe that Furong 2Q24's business is under pressure due to: 1) weak downstream demand for consumer electronics, the growth rate of related business revenue is slower than the rate of new production capacity, and the overall operating rate is low; 2) the company is still in the early stages of development, with some expenses ahead, putting pressure on performance; 3) the average price of the company's upstream raw material aluminum ingots has increased, and the cost of bulk materials has dragged down the company's gross margin.

By business, 1H24 Furong: 1) The consumer electronics business achieved revenue of 0.818 billion yuan, an increase of 10% over the previous year. We think it was mainly due to the high market recognition of Samsung S24 and folding screen products, driving revenue growth. Combined with Apple's release of the new iPad series products in May, shipments of Furong related businesses increased significantly; 2) The round ingots, waste and new energy business achieved a total revenue of 0.224 billion yuan, an increase of 80% over the previous year. We think the main reason is that the round ingots, a subsidiary of Furong Renewable Resources, began selling round ingot products abroad. Drive revenue growth, add a small amount of power battery tray production capacity, and contribute to part of the revenue increase.

Development trends

The cooling design of AI terminals has been upgraded, and aluminum alloy is expected to become the preferred material. We believe that cooling is one of the important components of AI terminal upgrades, and the exterior parts of products such as PCs are expected to be upgraded from plastics to aluminum alloys. Furthermore, at present, the world's high-end phones still use titanium alloy as the middle frame material, but we believe that the cooling capacity of titanium alloy is significantly weaker than that of aluminum alloy. Mobile phone brands are expected to switch the middle frame of high-end models to aluminum alloy in the future to meet the cooling needs of AI phones. As one of the core suppliers of 7 series aluminum alloy materials in the world, Furong has been steadily supplying Samsung S series and folding screens for a long time. In the future, it is expected to take the lead in benefiting from high-end mobile phone material switching opportunities and drive continued growth in related revenue. Furthermore, the gross margin of 7 series aluminum is higher than the company average, which is expected to help Furong improve its gross margin.

New energy and automotive aluminum are actively developing customers, and 2H24 is expected to start mass production. According to the semi-annual report, 1H24 Furong took the initiative to connect with consumer electronics and automobile customers to certify the Luoyuan production base and obtained industry QEO certification to push automotive products into mass production. At the same time, 1H24 has completed pre-production preparations such as mold trial production, process run-in, and customer verification. We expect 2H24 Furong's new energy business to rapidly climb in volume, drive revenue growth in related businesses, or improve profitability.

Profit forecasting and valuation

Considering that downstream demand for consumer electronics and new energy is still weak, and the profitability of Furong related businesses is under pressure, we lowered 2024/25e EPS 23%/16% to 0.31/0.40 yuan. The current stock price corresponds to 2024/25e 37.7/29.3x P/E. We maintain our outperforming industry rating. Considering that the market already expects Furong's 2024 performance to be pressured, we lowered our target price by 18% to 14.0 yuan, corresponding to 2024/25e45.6/35.4x P/E, which has room for 21% increase compared to the current one.

risks

The aluminum alloy upgrade trend for AI terminals fell short of expectations; Furong New Energy's business development fell short of expectations.