1H24 results were slightly lower than our expectations

The company announced the interim report: 1H24 revenue was 1.9 billion yuan, -7% YoY; net profit to mother was 0.186 billion yuan, -12% YoY; net profit after deducting non-net profit was 0.176 billion yuan, -15% YoY. Corresponding to 2Q24 revenue of 0.94 billion yuan, -11%/-3% YoY; net profit to mother was 0.094 billion yuan, -12%/+1% YoY; deducted non-net profit was 0.082 billion yuan, -24%/-13% YoY. 1H24's profit was slightly lower than our expectations, mainly due to the confirmation of equity payment fees and losses affected by changes in the fair value of financial assets about 30 million yuan.

Development trends

Revenue declined in 2Q24 due to weakening domestic and foreign industry demand, and gross margin improved month-on-month. According to the China Automobile Association, the 2Q24 heavy truck industry's sales volume was -15% to 0.232 million vehicles, and the light truck industry's sales volume was -1% month-on-month to 0.9709 million vehicles. The company's 2Q24 revenue growth rate was similar to that of the truck industry. Among them, the domestic market share for heavy engine crankshafts was 60%, and the domestic market share for diesel light engine crankshafts was 42%. 1H24's export revenue was -12.2% year-on-year, mainly due to declining demand in overseas construction machinery, agricultural machinery and commercial vehicle markets such as Europe and North America. 1H24's gross profit margin was 25.1%, -0.1ppt year over year; of these, 2Q24's gross profit margin was 25.9%, -0.4pp/+1.6ppt. Against the backdrop of revenue pressure, the company achieved a month-on-month improvement in gross margin through various cost reduction and efficiency methods such as homemade raw material supply and automated equipment transformation.

Management expenses were increased by equity payments, and net cash and operating cash flow were abundant. The sales/management/R&D/finance expense ratios of 1H24 were 2.2%/5.5%/6.6%/-0.8%, respectively, compared with +0.3pp/ +1.4pp/+0.6pp/ -1.0ppt, respectively. Mainly due to equity payment expenses, the management expenses increased by about 15 million yuan. 1H24's net interest rate was -0.6ppt to 9.8% year-on-year, affected by losses due to changes in the fair value of transactional financial assets of 17.55 million yuan. As of the end of 1H24, the company had monetary capital of 1.47 billion yuan, short-term loans of 0.71 billion yuan, undistributed profit of 3.05 billion yuan, and abundant net cash. 1H24's operating cash flow was 0.47 billion yuan/year over year +21%, exceeding the net profit level for the same period.

The heavy truck business is being catalyzed by policies, and plans to build overseas plants to expand growth. The central commercial vehicle trade-in subsidy was implemented at the end of July. We are optimistic that the policy will increase the domestic demand in the industry. We expect sales in the heavy truck industry to increase to 0.95-1 million vehicles year-on-year throughout the year, and the company's main product, crankshaft connecting rods, will continue to benefit from the industry beta. The company actively promotes emerging businesses such as idle suspension and electronic control switching. 1H24 airborne revenue was +2.0% to 0.13 billion yuan, and gross margin was +0.2ppt to 26.3% year-on-year. In August, the company announced that it plans to establish a relevant subsidiary and invest in the construction of a factory in Thailand. We believe it is expected to promote overseas business expansion and serve international OEM customers.

Profit forecasting and valuation

Considering the increase in management expenses and the decline in demand in the overseas commercial vehicle industry, we lowered our profit forecast for 2024/2025 by 20%/20% to 0.42/0.51 billion yuan. Due to the company's leading position in commercial vehicle crankshaft connecting rods, it maintained an industry rating. The current stock price corresponds to 10.6/8.9 times 2024/2025 P/E. The target price was lowered by 26% to 5.56 yuan, corresponding to 15.0/12.5 times the 2024/2025 P/E multiplier, which is 41.1% higher than the current one, taking into account the downturn in profit forecasts and the decline in the valuation center of the auto parts sector.

risks

Production and sales in the commercial vehicle industry fell short of expectations, development of emerging businesses fell short of expectations, and customer expansion fell short of expectations.