Incident: On August 22, the company released its 2024 mid-year report. 1H24 achieved revenue of 2.547 billion yuan, YOY +5.6%; net profit to mother of 0.604 billion yuan, YOY +9.5%; deducted non-net profit of 0.594 billion yuan, YOY +9.8%. The performance was in line with expectations. 1H24 Company operates steadily, moderately and positively, has a new structure, and excellent quality and efficiency. The 2024 business plan revenue completion rate is 51%, and the total profit completion rate is 55%. Our comprehensive review is as follows:

2Q24 net profit increased steadily; 1H24 net margin increased year-on-year. 1) Looking at a single quarter: The company achieved revenue of 1.23 billion yuan, YOY +6.0%; net profit to mother of 0.253 billion yuan, YOY +16.4%; after deducting non-net profit of 0.243 billion yuan, YOY +13.0%. Performance has been growing steadily. 2) Profitability: 1h24 gross margin decreased by 0.4 ppt to 37.3% year on year and remained stable; net margin increased 1.2ppt to 24.0% year on year.

Promote the construction of aviation pre-impregnation production capacity; domestic and foreign orders from Premium Materials Bermuda have increased. By business, 1H24:

1) New aviation materials: Achieved revenue of 2.518 billion yuan, YOY +6.12%, mainly due to the increase in delivery of main pre-impregnation and carbon brakes; net profit of 0.633 billion yuan, YOY +10.25%, mainly due to increased delivery of aviation composites and carbon brakes. The company is carrying out the construction of a project to increase the production capacity of advanced aviation pre-impregnation. It will build the first digitally intelligent advanced pre-impregnation production line in China, and the pre-impregnation production capacity will be greatly increased after production is put into operation.

2) Industrialization of advanced aviation manufacturing technology (including high-end intelligent equipment): Achieved revenue of 15.73 million yuan, 1H23 was 25.21 million yuan. The year-on-year decrease was mainly due to a decline in sales of ordinary machine tools and special equipment; net profit to mother - 11.65 million yuan, close to the same period last year. At 1H24, the holding subsidiary Youcai Bermuda achieved revenue of 0.117 billion yuan, YOY +105.7%; net profit of 14.5 million yuan, reversing losses over the previous year. Domestic and foreign market orders increased, and Premium Bermuda's performance grew rapidly.

Cost control capabilities have improved; advance payments for composite materials in the aviation industry have increased. The cost ratio decreased by 1.5ppt to 8.6% year on year during the 1H24 period. Among them, the management fee rate decreased by 1.1 ppt to 6.1% year on year; R&D expenses decreased by 0.3 ppt to 2.5% year on year; and R&D expenses decreased by 6.7% to 0.063 billion yuan year on year, mainly due to individual R&D projects being implemented in 3Q24. As of the end of 2Q24, the company: 1) accounts receivable and notes were $4.319 billion, up 2.8% from the end of 1Q24; 2) prepayments of $0.039 billion, up 67.0% from the end of 1Q24, mainly due to an increase in prepaid equipment and materials for the aviation industry; 3) inventory of 1.09 billion yuan, a decrease of 2.3% from the end of 1Q24; 4) Contract liabilities were 0.053 billion yuan, a decrease of 15.0% from the end of 1Q24. The net cash flow from 1H24's operating activities was $0.343 billion, and 1H23 was $0.408 billion.

Investment advice: The company is a leading aviation carbon fiber pre-impregnation enterprise in China and is at the hub of the industrial chain.

Thanks to the acceleration of the commercialization process of domestic civil aircraft represented by the C919 and the development of new types of productivity such as the “low-altitude economy”, composites have more market demand and application prospects. We expect the company's net profit from 2024 to 2026 to be 1.185 billion yuan, 1.436 billion yuan, and 1.736 billion yuan, respectively. The current stock price corresponds to 2024-2026 PE of 22x/18x/15x. We maintain a “Recommended” rating considering the long-term growth and business scalability of the company's aeronautical composites.

Risk warning: downstream demand falls short of expectations, falling product prices, etc.