Incident: On August 25, the company released its 2024 semi-annual report. 1H24 achieved revenue of 0.066 billion yuan, YOY -81.8%; net profit to mother of 0.039 billion yuan, 1H23 was 0.03 billion yuan; after deducting non-net profit - 0.041 billion yuan, 1H23 was 0.022 billion yuan. The performance was basically in line with market expectations. The year-on-year decline in the company's performance was mainly due to a decrease in the delivery of complete radar products. Our comprehensive review is as follows:

Lost money for 2 consecutive quarters due to industry effects; profit margins fluctuated. 1) Single-quarter perspective: 2Q24 achieved revenue of 0.038 billion yuan, a year-on-year decrease of 87.66% and a month-on-month increase of 39.32%; realized net profit to mother -0.023 billion yuan, and 2Q23 was 0.047 billion yuan. Affected by industry factors, the company lost money for two consecutive quarters in 1Q24 and 2Q24. 2) In terms of profit margin: 1H24's gross margin fell 15.1ppt to 12.8% year-on-year, and profit margins fluctuated. 3) By product: 1H24, the radar and supporting equipment business achieved revenue of 0.033 billion yuan, YOY -89.3%; the radar parts business achieved revenue of 0.025 billion yuan, YOY -52.1%.

Inventory/contract liabilities increased; repayments affected operating cash flow. The company's expenses during the 1H24 period were 0.061 billion yuan, a year-on-year decrease of 29.4%. However, due to a significant decline in revenue, the cost rate for the period rose to 92.8%, including: 1) the sales expense ratio increased by 4.5ppt to 5.6% year over year; 2) the management cost ratio increased 35.1ppt to 42.4% year over year; 3) the R&D cost ratio increased 52.2 ppt to 71.1% year over year; and R&D expenses decreased by 31.5% year on year to 0.047 billion yuan. As of the end of 2Q24, the company: 1) accounts receivable and notes were $0.258 billion, the same level as at the end of 1Q24; 2) inventory was $0.452 billion, up 9.9% from the end of 1Q24; and 3) contract liabilities were $0.154 billion, up 14.9% from the end of 1Q24. The net cash flow from 1H24 operating activities was -0.157 billion yuan, and 1H23 was 0.281 billion yuan, mainly due to a year-on-year decrease in the company's accounts receivable payments.

Create a diversified development pattern; accelerate the cultivation of new quality productivity. Core competitiveness: 1) Building a diversified development pattern: The company is one of the main producers of air defense warning radars in China. The products are the main equipment in the field of air defense warning in China; at the same time, the company continues to push products into the international market. While further expanding the air defense warning radar business, the company is developing related radar supporting equipment, low-altitude detection equipment, air traffic control equipment and other products to promote a diversified development pattern. 2) Cultivating new productivity: The company actively lays out new industries, and the Low Altitude Division participates in the demonstration and discussion of local government low-altitude economic development plans. Using years of technology accumulation in early warning and detection of low-altitude targets, the company continues to carry out key technical research and development of new products around the needs of the low-altitude market, continues to increase research and development efforts on low-altitude safety detection products and low-altitude safety detection systems, etc., and accelerates the cultivation of new quality productivity.

Investment suggestion: The company is a complete development unit for scarce air defense warning radar in China. It is a national-level specialized and new “little giant” enterprise. It benefits from the continuous growth in domestic demand for equipment and the demand for equipment going overseas and in the civil sector. At the same time, it is actively expanding new businesses such as low altitude around the development requirements of new quality productivity. Taking into account the pace of demand to adjust the profit forecast, the company's net profit from 2024 to 2026 is 0.081 billion yuan, 0.109 billion yuan, and 0.141 billion yuan, respectively. The current stock price corresponds to the 2024-2026 PE of 55x/41x/32x. We take into account the advantages of the company's radar manufacturing industry chain layout and maintain a “recommended” rating.

Risk warning: downstream demand falls short of expectations, changes in prices and profit margins, etc.