Incidents. On August 20, the company released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 0.452 billion yuan, an increase of 36.12% year on year; realized net profit of 49.3028 million yuan, up 9.50% year on year; realized net profit after deduction of 45.2589 million yuan, an increase of 14.24% year on year.

The telecommunications market gradually recovered, and direct orders increased, driving a steady increase in performance. Since 2023, AI computing power construction, represented by the big model, has continued to advance, driving a sharp increase in server and data center capital expenses, driving a gradual recovery in demand in the communication connector market, and increasing the company's direct customer orders, which led to steady growth in the company's performance in the first half of the year. In the first half of 2024, the company achieved revenue of 0.452 billion yuan, an increase of 36.12% year on year; realized net profit of 49.3028 million yuan, up 9.50% year on year; realized net profit after deduction of 45.2589 million yuan, an increase of 14.24% year on year. Looking at a single quarter, the company achieved revenue of 0.258 billion yuan in 2024Q2, up 51.72% year on year, up 33.14% month on month; realized net profit of 31.0702 million yuan, up 163.18% year on year, up 70.41% month on month; realized net profit without deduction of 29.4872 million yuan, up 221.19% year on year. In terms of gross margin, 2024H1 achieved a gross profit margin of 27.56%, a year-on-year decrease of 2.53%. The company's high-speed communication connectors and component products are mainly produced according to customer needs. The product structure is complex, the accuracy requirements are strict, and the gross margin remains at a high level in the industry; however, due to increased competition in the NEV market, the company actively adjusts its product structure and gradually eliminates some loss-making products, and the automotive connector business will steadily increase.

Continue to increase investment in R&D and continuously improve the utilization rate of production capacity. The company incurred R&D expenses of 39.9759 million yuan in the first half of 2024, an increase of 14.84% over the previous year, and the R&D expenditure rate was 8.84%. With the advent of new application scenarios such as AI, along with the increase in computing power density, the thermal density of computing power equipment and data center cabinets has increased significantly, speeding up the introduction of liquid cooling technology. The company's communication module is developing the I/O connector cage 224G while also adding liquid cooling design to reduce its energy consumption; at the same time, backplane connector products are also being developed in a variety of ways, including products such as Overpass/Mini SAS. The product structure tends to be miniaturized and the accuracy is more precise. Meanwhile, 24H1's new QSFP-DD/QSFP 112G series has begun mass production, and demand for old products such as QSPF56G continues to grow, and 224G products have now entered the small-batch trial production stage; as of July 2024, the monthly production capacity of the company's 112G and 56G Cage products is also gradually increasing. Among them, 112G is mainly 2×1, 2X4 series, and 56G is mainly 1×1 and 1x4 series. In terms of automotive connectors, the electronic control series connector products developed by the company in the past have remained in mass production; for some copper row products, the company has made business adjustments due to the large increase in bulk raw materials and the impact on costs; the BMS Gen6 battery project under development has gradually entered the small-batch trial production stage. The Henan Xinyang subsidiary currently mainly produces automotive connector products. With investment in the IPO project, output value may be greatly increased in the future, but the operating rate still needs to be increased. We believe that as the AI industry and data center sector continue to develop, demand in the communication connector market will gradually expand, company orders may continue to rise steadily, and future performance is expected to continue to grow.

Profit forecasting and investment ratings. We predict that the company's net profit for 2024-2026 will be 0.095/0.128/0.171 billion yuan, and EPS will be 0.69/0.92/1.23 yuan respectively in 2024-2026. The current stock price is 52/40/29 times PE, respectively. As demand for the company's communication connector products gradually recovers and production capacity continues to be released in various regions, we are optimistic about the company's future development and maintain a “buy” rating.

Risk warning: macroeconomic risk; increased risk of market competition; risk of technological iteration; risk of declining gross margin.