Incident: The company released its 2024 semi-annual report. In the first half of the year, the company achieved operating income of 2.742 billion yuan, achieved net profit of 0.372 billion yuan, +34.85% year over year, realized net profit deducted from non-mother 0.343 billion yuan, +32.09% year over year, EPS was 0.92 yuan, and +35.23% year over year. In Q2 2024, the company achieved operating income of 1.325 billion yuan, +26.45% year over month, -6.49% month on month, realized net profit of 0.153 billion yuan, +6.08% year on month, 30.38% month on month, realized net profit without deduction of 0.143 billion yuan, 4.81% year on year, and -28.38% month on month.

Affected by changes in product and customer structure and annual decline, the company's Q2 gross margin was under pressure in the short term: H1, 4.47pct in 2024, -5.86pct, a significant drag on the gross margin for the first half of the year. Mainly due to three factors, the company's gross margin was 29.14%, year-on-year -1.78pct, of which Q2 gross margin was 26.12%, year-on-year - the impact: First, the company's lighting control system, motor control system, energy management system, in-vehicle electrical appliances and electronics achieved revenue of 1.378 billion, respectively Yuan/0.439 billion yuan/0.319 billion yuan/0.415 billion yuan, respectively, +35.97%/+21.14%/+103.77%/+27.52% year-on-year, energy management system revenue grew rapidly, but the gross margin level was weak compared to other product lines. The gross margin of energy management systems in 2023 was 26.49%, lower than lighting control systems (29.30%), motor control systems (27.56%), and vehicle appliances and electronics (27.37%); the second is customer structure Changes. With leading product quality and technical level, the company continued to break through new customers. In the first half of the year, new car builders accounted for more than 15% of the company's customers, with ideal sales volume of about 0.3 billion yuan, an increase of 157.5% over the previous year, and the sales share rose from 5.9% to 11%, making it the company's fourth largest customer. The rise of new domestic forces contributed to the company's new performance growth impetus, but the company relinquished some of its prices in developing new customers; third, the company's gross margin level is expected to benefit from the increase in sales volume of downstream customers during the peak season The scale effect, which began in the second quarter, was reflected in a month-on-month decline in the company's revenue in Q2 and a month-on-month decline in gross margin in Q2. The year-on-month recovery was higher.

The decline in the cost ratio during the period hedged the impact of part of the decline in gross margin: In H1 in 2024, the company's net interest rate fell 0.50 pct year on year to 13.55%. The decline in the cost ratio during the period hedged the impact of part of the decline in gross margin on profitability. In 2024 H1, the company's R&D expense ratio was -2.64 pct to 8.11% year on year, new products entered mass production stage one after another, and R&D expenses increased steadily; the sales expense ratio was +0.57 pct to 2.28% year over year, mainly due to the increase in sales service fees, which were affected by the transmission of price reduction pressure from OEMs. The price reduction pressure of customers had a great impact on the company's Q1 sales cost rate. The Q2 price reduction pressure was mainly reflected on the gross margin side. The sales expense ratio for the single quarter was only 0.88%, -0.64 pct year on year, -2.71 pct year on month; management cost ratio 1.19pct to 4.27%, thanks to the increase in the company's size effect; the financial expense ratio was +1.67pct to 0.72% year over year, mainly affected by exchange gains and losses.

New products continue to gain global recognition, and the overseas market is expected to become a new engine for the company's performance growth: the company has close cooperative relationships with leading global OEMs, including Volkswagen, Daimler, BMW, Ford, Renault, etc., and has good international market expansion capabilities. In the first half of the year, the company obtained 43 new targeted projects for Volkswagen Global, BMW, Audi, FAW Hongqi, Tesla, Xiaopeng and other customers. By the end of June 2024, there were a total of 136 projects under development, including Volkswagen, BMW and BMW. Audi, Mercedes-Benz, Tesla, American Cummins, Germany's Deutz and other customers have 21 global platform projects, and obtained Volkswagen Group's next-generation LED headlight controller project, leading the pace of globalization. Relying on competitive advantages in overseas markets, the company's new products continue to gain global positioning, such as Efuse, chassis suspension controller DCC, and ASC successfully entered the public support system; eLSV (electronic steering column controller) was fixed on BMW's global platform; DCDC (DC power converter) was targeted by Porsche and Audi projects; intelligent thermal management actuators were targeted by Audi and BMW global projects. The company's overseas market project cycle is long, and profitability is expected to contribute steadily to the company's growth.

Investment suggestions: From 2024 to 2026, the company is expected to achieve operating income of 6.286 billion yuan, 7.773 billion yuan, 9.295 billion yuan, and net profit to mother of 0.839 billion yuan, 1.128 billion yuan, 1.452 billion yuan, and diluted EPS of 2.08 yuan, 2.79 yuan, and 3.60 yuan, respectively. The corresponding PE is 21.93 times, 16.32 times, and 12.68 times, respectively, maintaining the “recommended” rating.

Risk warning: the risk that downstream customer sales will fall short of expectations; the risk of overseas customer expansion falling short of expectations; the risk that the gross margin of a new project falls short of expectations.