Mingxin Xuteng announced its 2024 interim results. 2024H1 achieved operating income of 0.466 billion yuan, +26.36% year-on-year, realized net profit of 0.01 billion yuan, or -39.89% year-on-year, and realized net profit without deduction of -0.002 billion yuan, or -284.37% year-on-year. Looking at a single quarter, Q2 achieved operating income of 0.242 billion yuan, a year-on-month ratio of +10.14%/+8.07%, realized net profit of -0.003 billion yuan, a year-on-month ratio of -113.62%/-123.31%, and realized net profit without return to mother of 0.01 billion yuan, or -183.38%/-225.59%, respectively.

The increase in phased expenses and depreciation affects the company's profit. 2024H1's gross margin was 27.62%, +2.10pct year on year; net profit margin to mother was 2.15%, -2.37pct year on year. 2024Q2 gross margin was 27.8%, -0.78pct/+0.34pct, respectively; net profit margin to mother was -1.3%, and -11.42pct/-7.08pct, respectively. 2024H1, the company's profitability declined year-on-year, mainly due to the increase in upfront investment and expenses of new domestic and foreign companies, the gradual conversion of early fixed asset investment, and increased depreciation.

Customer structure optimization, product category expansion and production capacity expansion continue to advance: 1) Suede microfiber leather, there is plenty of room for domestic replacement, opening up room for the company to grow. According to the company's convertible bond offering instructions, the domestic market demand for microfiber leather is expected to be 0.35 billion square meters, but the production capacity is only about 0.26 billion square meters, so there is a large gap between supply and demand in the domestic market. The domestic automotive microfiber leather market is mainly occupied by importers such as Italy's Odyllan and Japan's Toray, which has a large domestic replacement space; 2) New energy customers are expanding smoothly, and the customer structure continues to be optimized. Since 2022, the company has been designated for several well-known automaker customer projects. The products supplied include leather, suede microfiber, etc., with a total project amount of about 2.5 billion yuan, and mass production will be carried out one after another in 2023-2024. The company is expected to fully benefit from the boom in new energy vehicles and achieve rapid growth in sales revenue for new energy customers; 3) The initial construction of the Mexican plant has been completed, and the internationalization strategy continues to advance. As of the 2024 semi-annual report, the company's overseas factory in Mexico has initially completed construction. Currently, it is in the equipment installation and commissioning stage. The IATF16949 quality system has been built simultaneously, and has successfully passed factory inspections for some North American customers. The next step is to promote product certification for overseas customers.

Profit forecast and valuation: Optimistic about the company's customer structure optimization, domestic replacement of microfiber leather, and overseas production capacity expansion. We expect the company's revenue to 2024-2026 to be 1.036/1.427/1.823 billion yuan respectively, net profit to mother of 0.074/0.132/0.165 billion yuan, and EPS 0.45/0.81/1.01 yuan/share, respectively. Corresponding to the current stock price PE is 25.88/14.53/11.60 times, maintaining the “gain” rating.

Risk warning: Industry competition intensifies, overseas production capacity expansion falls short of expectations, and new project expansion falls short of expectations.