Description of the event

The first half of the year achieved operating income of 5.49 billion yuan, an increase of 16% year on year; attributable net profit of 0.45 billion yuan, a decrease of 64% year on year, and a decrease of 67% year on year after deducting non-net profit. In the second quarter, revenue was 2.93 billion yuan, up 30% year on year, and attributable net profit was about 0.14 billion yuan, down 83% year on year, and reduced 85% year on year after deducting non-net profit.

Incident comments

Revenue performance was strong and profit performance weakened. The company's revenue in the first half of the year increased 16% year on year, and overseas business accounted for more than 60% of revenue. The company's main business is building materials machinery and overseas building materials. The revenue of the two was 2.705 and 1.984 billion yuan respectively, accounting for 49% and 36% of revenue respectively. Revenue increased 29% and 4% year-on-year, which is the core revenue growth driver. Furthermore, the lithium battery materials and equipment business was under pressure, with revenue of about 0.3 billion yuan in the first half of the year, down 27% from the previous year. In the first half of the year, the combined profit of the company Lanke Lithium fell from 0.85 billion yuan in the same period last year to 0.14 billion yuan. Excluding the profit contribution of lithium carbonate investment income, the net profit attributable decreased by 0.32 billion yuan from 0.41 billion yuan in the same period last year. Considering that exchange gains of 0.11 billion yuan were generated in the first half of last year and 0.06 billion yuan in exchange losses in the first half of this year, the profit contribution to the company's main business increased steadily and moderately in the first half of the year.

The decline in profitability stemmed from falling overseas building materials prices and exchange losses. According to the report, gross margin for the first half of the year was about 25.6%, down 6.1 percentage points year on year, and gross margin for the second quarter was about 24.6%, down 6.7 percentage points year on year. However, during the first half of the year, the rate was about 18.8%, an increase of 4 percentage points over the previous year, mainly due to the increase in the financial rate of 4 percentage points after the increase in exchange losses. The rate during the second quarter was about 21.3%, an increase of 10 percentage points year over year. The devaluation of some African currencies led to a sharp increase in exchange losses (including unrealized exchange losses due to external loans).

Overseas building materials: Some markets ushered in price increases. The company has operated 7 factories in 6 countries in Africa, with 19 building ceramics production lines and 2 sanitary ware production lines. In the first half of the year, tile production exceeded 0.084 billion square meters, an increase of about 20% over the previous year, and the production of sanitary ware exceeded 1 million pieces, achieving revenue of about 1.98 billion yuan, an increase of 4% over the previous year. The price of ceramic tiles was high and low last year, causing the gross margin to drop to 31.0% in the first half of the year. On a month-on-month basis, gross margin for the full year of last year was 35.7%, of which 43.6% was in the first half of the year and 27.0% in the second half of the year, so the trend of improving gross margin in the first half of 2024 is already evident. The decline in ceramic tile prices since the second half of last year is mainly due to factors such as structural competition in the market and strategic price adjustments for projects. Currently, the sales prices of the company's ceramic tile products in countries such as Kenya, Tanzania, and Ghana in Africa have increased, and the trend of improving gross margin is expected to be even more significant in the second half of the year.

Building materials machinery: High growth in revenue and order acceptance. The company's building materials machinery revenue increased by about 29% year-on-year in the first half of the year, reflecting the global competitiveness of the company's ceramic machinery against the backdrop of weak domestic and foreign economies. The company's ceramic machinery business accounts for more than 60% of overseas orders, benefiting from the company's deep exploration of emerging markets and the development of high-end markets. Southeast Asia, the Middle East, Europe and South Asia have achieved better order acceptance conditions. At the same time, the company continues to improve the “equipment+accessories, consumables+service” business portfolio.

I am optimistic about the steady growth of the company's main business in the future. The company's core business is highly competitive and is expected to continue to grow: first, ceramic equipment is a global oligarchy industry pattern, and the company's global market share has increased, and its current order acceptance and profitability have reached new highs; second, African building materials. The company is a leading African ceramic tile company, which has advantages in production, channel, brand, etc., in the niche market. After optimizing the current market pattern, price increases began, and may benefit from US interest rate cuts in the future. The company's operating quality is excellent. Not only does the net present ratio exceed 1, but investment income continues to receive cash inflows of 3, 1.5, and 0.4 billion yuan for 2022, 2023, and 2024H, respectively.

The company's net profit for 2024-2025 is estimated to be about 1.2 or 1.35 billion yuan, corresponding to 11 or 9 times the purchase rating.

Risk warning

1. Low expectations for the company's overseas production capacity investment;

2. Competition in the African building materials market has intensified.