incident. The company released its 2024 mid-year report, achieving revenue/net profit/net profit after deducting non-net profit of 1.575/0.136/0.113 billion yuan for the first half year, -14.56%/-33.25%/-33.89%; of these, 24Q2 achieved revenue/net profit to mother/ net profit of 0.811/0.08/0.069 billion yuan, -16.59%/-34.96%/-45.82% year-on-year.

Market competition intensifies, and new projects fall short of expected revenue, and the active layout of new projects/customers can be expected in the future. 24H1's revenue from innovative consumer electronics/intelligent control components/health environment products/automotive electronics products was 4.76/0.586/0.063/0.267 billion yuan, -7.56%/-6.52%/-75.86%/+21.86%, accounting for 30.24%/37.19%/3.98%/16.95%, respectively. The year-on-year decline in innovative consumer electronics revenue was mainly due to market competition, switching between old and new projects, and delays in capacity release of major new projects; healthy environmental products Mainly affected by the development of emerging business formats such as cross-border e-commerce, market competition has intensified, and the inventory situation of downstream customers has also had an adverse impact on the sector; automotive electronics business companies have benefited from the rapid increase in the allocation rate of several new products, and have also successfully obtained project targets from SAIC Audi and India Kode. 24Q2 revenue decreased 16.59% year over year to 0.811 billion yuan. Looking forward to the future, the company is currently receiving key new project opportunities from major customers in the fields of e-cigarettes, household engraving machines, electric bicycles, office and analog control, and is also deploying in the field of intelligent medical care to prepare for next year's development.

The core business fell short of expectations and gross margin was temporarily under pressure, and maintaining R&D expenses laid the foundation for another take-off. 24h1 gross margin/net margin was -2.11/-2.98pct to 28.43%/9.2%, innovative consumer electronics/intelligent control components/automotive electronics gross profit margin 25.81%/27.07%/29.8%, year-on-year -8.04/+4.43/+0.55pct. Among them, the decline in gross margin of innovative consumer electronics or reduced capacity utilization in the core product engraving machine business mainly dragged down the overall business profit level; we believe that the increase in gross margin of intelligent control components is mainly due to changes in product structure, high margin products such as Logitech, video conferencing, etc. The increase in the proportion of products led to an increase in profit levels. 24q2 gross margin/net margin was -1.9/-2.95pct yoy to 29.22%/10.92%, the main reason was the same. 24Q2 sales/management/R&D/finance expenses were 0.2/0.057/0.085/-0.013 billion yuan, and the sales/management/R&D/finance cost ratio increased by 0.36/0.17/1.19/3.82pct. The increase in R&D expenses was mainly due to the company's continuous development of new projects and maintaining the number of R&D personnel. The increase in financial expenses was mainly due to a decrease in net income due to exchange rate fluctuations. 24Q2 operating cash flow was $0.11 billion, or -46.03% year over year, mainly due to reduced revenue compounded by downstream repayment periods.

Investment advice: The company is deeply involved in UDM's intelligent manufacturing business, and the UDM 2.0 customer base and product matrix reserves are further enriched. The company obtained the “Tobacco Monopoly Manufacturer License”, and the entire e-cigarette machine was successfully mass-produced. As the company's supply chain system gradually matures, the company is expected to participate deeply in the development of new products for customers. Inventory consumption of engraving machine products is nearing its end, along with a gradual recovery in consumption, and revenue is expected to increase steadily. Automotive electronics are growing rapidly, and we are optimistic about the development of new products such as smart cockpits and dimming glass controllers. The company's net profit for 2024-2026 is expected to be 0.461/0.636/0.845 billion yuan, corresponding PE is 18/13/10X, maintaining the “recommended” rating.

Risk warning: the risk of exchange rate fluctuations, downstream customer demand is slowing down, and the e-cigarette business falls short of expectations.