1H24 results are in line with our expectations

The company announced 1H24 results: 1H24 achieved operating income of 11.09 billion yuan, +13.8% year-on-year, and net profit to mother of 1.07 billion yuan, +20.4% year-on-year. The results were in line with our expectations.

Development trends

Overall revenue growth is steady, and the international market revenue growth rate is even brighter. By region, 1H24's revenue in the international market/domestic market was 6.56/4.53 billion yuan respectively, +18.6%/7.5% (adjusted in caliber). The domestic and foreign revenue growth rate was superior to the sales growth rate of the corresponding regional industry. The company believes that the faster revenue growth rate in the international market is mainly driven by overseas battery box business and traditional business growth in North America and the Asia-Pacific region. By division, the share of Japanese and American revenue declined in 1H24. We think it was mainly due to domestic joint ventures, and their overseas business continued to expand. By business, the revenue of 1H24 battery boxes/aluminum/plastic/metal and accessories was 23.9/2.37/2.84/2.52 billion yuan, respectively, +33%/+14%/+1% year-on-year, respectively. All businesses maintained a good growth trend.

Gross margin improved markedly year over year, and rates gradually rebounded year over year during the period. The gross margin of 1H24 was 28.5%, +2.2ppt/month-on-month. The company believes that the year-on-year improvement in gross margin mainly benefits from the company actively reducing procurement costs and integrating the supply chain, improving production efficiency and product qualification rate and scale effects. The gross margins of battery boxes/aluminum parts/plastic parts/metal and accessories were 20.6%/35.0%/24.1%/26.6%, respectively, +2.7/-0.9/+2.0/+0.2ppt. We believe that the year-on-year decline in the gross margin of aluminum parts was mainly affected by the climbing pace of new projects such as Mexico and Serbia, and the impact of rising aluminum prices is relatively manageable. Sales/management/R&D expenses were 0.53/0.74/0.72 billion yuan respectively, with year-on-year increases; corresponding sales/management/R&D rates were 4.8%/6.7%/6.4%, respectively, +1.1/+0.3/+0.1ppt. The company believes that the year-on-year increase in sales expenses is mainly affected by the rise in global shipping prices.

Cash flow is gradually improving, and global supply capacity is favored. 1H24 has made progress in a number of new businesses. According to the company's semi-annual report, the company increased its structural parts business share at Honda in North America, received orders for subframes, electronic control cases and motor cases for the first time, and received orders for battery cases from various middle customers such as Xiaopeng, and orders for hidden doorknobs and luminescent signage products from Hongmeng Zhixing. New businesses such as seals and wireless charging are also continuing to advance. The company continues to implement an asset-light strategy for traditional products and adjusts the investment pace according to demand. 1H24 capital expenditure was 1.093 billion yuan, a sharp drop over the previous year. We expect 2H cash flow to continue to improve and gradually return to normal dividend levels. We believe that the company's global layout has entered a harvest period. In the context of the expansion of global trade, the company's localized supply capacity is expected to be favored by more global customers and open up room for long-term growth.

Profit forecasting and valuation

We generally maintain our profit forecast for 2024/2025. Maintaining an outperforming industry rating, the current stock price corresponds to 4.9/4.1x 24E/25E P/E. The parts sector's valuation is under pressure. We lowered our target price by 20% to HK$16, corresponding to 7x/6x 24E/25E P/E, with 49% upside compared to the current stock price.

risks

The decline in domestic joint ventures intensified; new business expansion fell short of expectations.