Incidents:

Hanzhong Precision Machinery released its 2024 mid-year report on August 24:2024H1 achieved revenue of 1.835 billion yuan, up 3.72% year on year; realized net profit of 0.451 billion yuan, up 23.30% year on year; realized net profit after deducting non-return to mother 0.425 billion yuan, up 20.84% year on year.

Investment highlights:

2024Q2's performance increased steadily. By product, 2024H1's compressor unit achieved revenue of 0.96 billion yuan, a year-on-year increase of 6.96%; vacuum products achieved revenue of 0.693 billion yuan, a year-on-year decrease of 7.11%; parts and maintenance revenue of 0.161 billion yuan, an increase of 65.79%; and casting products achieved revenue of 0.021 billion yuan, a year-on-year decrease of 25.99%. 2024Q2 achieved revenue of 1.085 billion yuan, up 0.60% year on year and 44.84% month on month; realized net profit of 0.304 billion yuan, up 22.21% year on year and 107.96% month on month; realized net profit without return to mother of 0.289 billion yuan, up 19.30% year on year and 111.62% month on month.

The gross margin increased significantly from month to month, and the ability to control expenses was optimized. 2024H1's gross margin was 40.45%, up 2.08pct year on year, and net margin was 24.63%, up 3.93pct year on year.

2024Q2's gross margin was 42.78%, up 3.44 pct year on year, 5.70 pct month on month, net margin was 28.11%, up 5.01 pct year on year, up 8.53 pct month on month.

The company's expense ratio for the 2024H1 period was 12.20%, a year-on-year decrease of 2.61 pct, of which sales expenses were 0.089 billion yuan, a year-on-year decrease of 0.38%; management expenses were 0.074 billion yuan, an increase of 10.83%; R&D expenses were 0.086 billion yuan, a decrease of 9.89% year on year; and financial expenses were -0.025 billion yuan.

Profit forecast and investment rating We expect the company to achieve revenue of 4.23, 4.722, and 5.47 billion yuan in 2024-2026, and achieve net profit of 0.957, 1.118, and 1.295 billion yuan to mother. The current price corresponds to PE 9, 8, and 7 times, respectively. The company is a leader in domestic screw refrigeration compressors, leading the domestic replacement process for pan-semiconductor vacuum pumps, and maintains a “buy” rating.

Risks suggest that semiconductor vacuum pump customer verification progress falls short of expectations, new product development progress falls short of expectations, risk of technological iteration, increased industry competition, risk of fluctuating raw material prices, inventory impairment and accounts receivable risk.