1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 0.833 billion yuan, -15.03%; net profit to mother of 0.12 billion yuan, or -46.05% YoY; deducted non-net profit of 0.117 billion yuan, or -46.96% YoY. Looking at a single quarter, 2Q23's revenue was 0.404 billion yuan, -25.90%, and -5.97% month-on-month; net profit to mother was 0.048 billion yuan, -60.58% year-on-year, and -34.00% month-on-month. The company's performance was in line with our expectations.

Development trends

Performance was pressured by the weak downstream economy, and microcontrollers and supporting integrated circuits performed well. The sales and performance of 1H24's core products are under phased pressure, mainly due to the weak downstream boom in special electronic components and the impact of price adjustments for some of the company's products. 1) The company's self-production business revenue was -23.67% to 0.432 billion yuan, and revenue from the core product porcelain capacitors was -26.84% to 0.367 billion yuan. Microcontrollers and supporting integrated circuits performed well. 1H24 revenue increased 48.94% year-on-year to 0.044 billion yuan. 2) Agency business revenue -3.20% YoY to 0.399 billion yuan. The downward trend in agency business revenue is slowing down, mainly due to the rapid increase in customer demand in the fields of new energy vehicles and high-voltage inverters expanded by the company, and a steady recovery in demand from some core customers.

Gross margin fluctuated, and cash flow improved significantly year over year. 1) 1H24's gross margin/net profit margin was -7.95pp/ -8.30ppt to 38.51%/14.44%, respectively, mainly due to changes in the company's product structure and price adjustments for ceramic capacitors. 2) The 1H24 company period expense ratio was +3.48ppt to 18.77% year over year, with sales/R&D/management expenses increasing by 1.69pp/ 1.28ppt/1.11ppt to 5.98%/6.09%/7.07% year over year. 3) The net cash flow from 1H24's operating activities was 0.102 billion yuan, a significant year-on-year improvement, mainly due to a sharp decrease in operating capital expenditure compared to the same period last year.

Increase research and development to establish product advantages, and expand the boundaries of capabilities with diverse layouts. 1) During the reporting period, the company continued to invest in R&D. 1H24 R&D expenses were 50.692 million yuan, accounting for 11.72% of the revenue from the self-production business. According to the company's 2024 semi-annual report, the company has completed the customized development of more than 90 filter specification products and the customized development of more than 40 microwave module products, and some products have been supplied in small quantities. 2) The company is actively exploring business development paths. It has established a new subsidiary in Hongyuan Tianjin, which specializes in materials such as electronic special materials and new ceramics; Chengdu Rongwei officially entered the list, mainly in the microwave component business; and the newly expanded microcontroller and supporting integrated circuit business in 2023 performed brilliantly. We believe that expanding business boundaries can drive diversification of the company's revenue streams and help the company grow.

Profit forecasting and valuation

Considering the pace of downstream demand release, we lowered our 2024 profit forecast by 61.3% to 0.26 billion yuan, and introduced a net profit forecast of 0.332 billion yuan for 2025. The current stock price corresponds to 30.2/23.7 times the price-earnings ratio for 2024/2025. We believe that the company may have reached an inflection point. We lowered our target price by 43% to 41.35 yuan to maintain our outperforming industry rating, corresponding to a price-earnings ratio of 36.8/28.9 times in 2024/2025, with a potential increase of 22%.

risks

1) Production capacity construction and commissioning progress fell short of expectations; 2) Product delivery fell short of expectations.