Key points of investment:

Tongda shares disclosed its 2024 interim report. In the first half of 2024, the company achieved operating income of 2.635 billion yuan, the same as last year; net profit to mother was 36.7775 million yuan, a year-on-year decrease of 59.38%. The company's 2024 semi-annual distribution plan is to distribute 1 yuan (tax included) for every 10 shares to all shareholders.

There was a slight decline in all businesses. There was a month-on-month improvement in the second quarter. In the first half of 2024, the company achieved operating income of 2.635 billion yuan, the same as last year; net profit to mother was 36.7775 million yuan, a year-on-year decrease of 59.38%; after deducting non-net profit of 31.973 million yuan, a year-on-year decrease of 63.29%. In 2024, Q1 and Q2 revenue were 1.057 billion and 1.578 billion, respectively, up -12.07% and 10.13%, respectively. Net profit for Q1 and Q2 was 0.015 billion and 0.022 billion, respectively, up -58.06% and -60.2% year-on-year respectively. Q2 revenue in a single quarter increased 10% year-on-year, and net profit increased 53% month-on-month, improving compared to Q1.

Look at it by business:

1) Wire and cable revenue of 1.204 billion, down 7.04% year on year, accounting for 45.7%; operating profit 0.17 billion, down 13.49% year on year, accounting for 76.21% of total operating profit; 2) aviation parts processing revenue of 0.076 billion, down 23.67% year on year, accounting for 2.87% of revenue; operating profit 0.016 billion, accounting for 7.3% of total operating profit; 3) Aluminum strip revenue 1.247 billion, up 1.56% year on year, accounting for 47.3% of revenue, operating profit 0.027 billion, accounting for 11.91% of total operating profit;

4) The trading business revenue was 0.109 billion, a 10-fold increase over the previous year. The operating profit was 10.24 million, accounting for 4.59% of the total operating profit.

The company's new orders in the first half of 2024 hit a record high for the same period. The wire and cable business announced large orders several times. The order situation improved, and revenue is yet to be gradually confirmed in the third quarter. At the same time, the gross margin of the company's cable sector declined year-on-year due to increased market competition and fluctuations in raw material prices.

The aircraft parts precision processing and assembly sector undertook a large number of research and development tasks, and new products were not delivered in batches, resulting in a year-on-year decline in gross margin. The aviation parts processing business revenue in the first half of the year was 0.076 billion, down 23.67% year on year, and the recovery in military demand fell short of expectations.

Competition intensifies the decline in gross margin, putting pressure on profitability

In the 2024 mid-year report, the company's gross margin was 8.46%, down 1.35 percentage points year on year; net interest rate was 1.65%, down 2.07 percentage points year on year; after deducting non-net interest rate of 1.21%, down 2.1 percentage points year on year.

By business: gross profit margin of wire and cable was 14.11%, down 1.05 percentage points year on year; gross profit margin of aviation parts processing was 21.51%, a sharp decrease of 16.97 percentage points year on year; gross profit margin of aluminum plate strip was 2.13%, up 0.3 percentage points year on year.

The aviation parts processing business was affected by factors such as military price reforms, the increase in pre-research projects by OEMs and the lack of mass production, and gross margin fell sharply.

Demand for wires and cables is growing steadily. In the medium to long term, market concentration continues to increase. Wire and cable is one of the largest supporting industries in the national economy. It ranks second among the segments of China's machinery industry. The scale of the industry exceeds trillion dollars, second only to the automobile and parts manufacturing industry. In the “14th Five-Year Plan” outline, it is mentioned optimizing the domestic energy structure, increasing the proportion of new energy sources, and building smart grids and ultra-long-distance power transmission networks. Overall demand for wires and cables is growing steadily. During the “14th Five-Year Plan” period, the State Grid plans to invest 2.4 trillion yuan in the power grid, and China Southern Power Grid plans to invest 670 billion yuan in the power grid. The State Grid estimates that the total investment in grid construction will exceed 500 billion yuan in 2024.

The number of enterprises in China's wire and cable industry is large, and the industrial concentration is low. The top ten wire and cable companies still account for less than 12% of the domestic market share. Industrial concentration is relatively high against developed European and American countries. Among them, the top five French wire and cable companies account for more than 90% of their domestic market share, the top seven Japanese wire and cable companies account for more than 65% of their domestic market share, and the top ten US wire and cable companies account for more than 70% of their domestic market share, all of which have entered the oligopoly competition stage. With the development of China's wire and cable industry and the continuous increase in demand for wires and cables, the trend of industry concentration will become higher and higher, and the company is expected to fully benefit in the medium to long term as a leading enterprise in the industry.

The company is one of the main domestic manufacturers of overhead bare wires. The production scale of bare wires is at the forefront of the country, and continues to have an advantageous position in the country in terms of standards, quality and production capacity scale. In terms of medium- and low-voltage cables and other cable products, the company has now successively developed flame-retardant B1 grade cables for rail transit, high-voltage cables for new energy vehicles, 70-year long-life cables, solar photovoltaic cables, and various types of fireproof cables, maintaining a leading position in the industry. The company's main wire and cable customers are large state-owned enterprises such as China Grid, China Southern Power Grid, China Railway Group, SDIC, Power Construction, and Energy Construction, mainly power grid customers. These major customers of central enterprises and state-owned enterprises have the characteristics of strong economic strength, good commercial reputation, and timely repayment, which guarantees the quality and sustainability of the company's profits.

The company signed new orders for the wire and cable business in the first half of 2024, reaching a record high of 0.12 billion in inventory, an increase of nearly 50% over the previous year, and 0.349 billion yuan of inventory products, an increase of 69.79% over the previous year. The company basically schedules production according to orders and determines production. The products and inventory products in inventory are products to be shipped. The rapid growth in products and inventory indicates a relatively rapid increase in the company's order demand. It is expected to gradually be reflected in the second half of the year, and the decline in the company's revenue in the first half of the year is expected to reverse.

Military demand was released in the second half of the 14th Five-Year Plan +C919. The inflection point of military business will reach an inflection point as the aviation industry's “small core, big collaboration” development strategy continues to be deepened, China's defense technology industry management and weapons equipment procurement system continues to improve, and the entry system for aircraft parts, large structural parts and aviation parts assembly research and development business is gradually improving, and private parts processing enterprises expand downstream of the industry chain, and the task level of private enterprises undertaking aircraft parts and large-scale structural parts production and development tasks.

The subsidiary Chengdu Hangfei is mainly engaged in high-end precision machining and component assembly services for aircraft structural parts and large-scale key structural parts. Its products include CNC machined parts such as titanium alloy, aluminum alloy frames, beams, ribs, and joints, sheet metal molding molds, composite molding molds, and aircraft component products, covering a variety of major military models as well as commercial aircraft such as the COMAC C919 and C929.

The 14th Five-Year Plan has entered the final stage of the second half. From now until 2025, there is only more than a year left in the 14th Five-Year Plan. It is expected that the accelerated release of military demand will drive the military support industry to a bottom reversal. Waiting for the inflection point of industry recovery to arrive, it is an important catalyst for the company's military business. Also, the C919, a large domestic aircraft, has entered the release stage. According to the “2020-2039 Civil Aircraft Market Forecast Annual Report” issued by COMAC, in the next 20 years, China's passenger aircraft market will receive more than 9,000 airliners with 50 seats or more, amounting to 1.4 trillion US dollars, and the size of the civil aircraft parts and processing market will reach 1.2 trillion yuan. In the context of the current imbalance between supply and demand in the global single-aisle mainline passenger aircraft market, the C919 will usher in a major historical opportunity. As a high-quality supplier in the C919 aviation parts processing industry chain, the company will benefit in the medium to long term.

In the first half of 2024, the company's aviation parts processing division undertook a large number of R&D tasks, delivered many pre-research products, and did not produce batch deliveries of new products. As a result, operating income declined markedly, gross margin also fluctuated greatly, and the recovery of the aviation parts processing business fell short of expectations in the first half of 2024. The second half of 2024 will gradually enter the peak delivery season for military products. With the gradual delivery of batch products, the aviation parts processing sector business is expected to achieve both revenue growth and gross margin restoration.

Profit forecasting and valuation

The company is a core supplier of domestic wires and cables. Demand for power grids, high-speed rail and other industries is steady, industry concentration continues to increase, and there is room for medium- to long-term growth. The aviation parts business is expected to benefit from the 14th to the final stage, and the release of military demand ushered in an inflection point in performance. The foreign-made C919 aircraft has entered the release stage, and the company's aviation parts military business is expected to fully benefit. The company's performance in the first half of the year fell short of expectations. We lowered the company's 2024-2026 revenue forecast to 6.175 billion, 6.896 billion, and 7.559 billion, respectively, and lowered the 2024-2026 net profit forecast to 0.142 billion, 0.21 billion, and 0.267 billion, respectively. The corresponding PE is 19.3X, 13.09X, and 10.27X respectively. Considering the current point of time, the company's stock price It has been fully adjusted, the negative factors have been fully absorbed, and valuations tend to be within a reasonable range. At the same time, the wire and cable business is expected to improve in the second half of the year. The military business is about to reach an inflection point, and the company's various businesses are on the verge of the bottom inflection point, continuing to maintain the company's “buy” rating.

Risk Warning: 1: Domestic grid fixed asset investment and demand falls short of expectations; 2: Product delivery falls short of expectations; 3: Industry competition intensifies and gross margin falls; 4: Fluctuations in raw material prices; 5: Military demand and product delivery fall short of expectations; 6: C919 mass production progress falls short of expectations.