1H24 results are in line with our expectations

The company released 1H24 results: revenue of 7.353 billion yuan, +15.5% year-on-year; net profit to mother of 0.497 billion yuan, +15.1% year-on-year. The results were in line with our expectations.

On a quarterly basis, 1Q/2Q24 achieved revenue of 3.476/3.878 billion yuan, respectively, +19.4%/+12.3% year-on-year; net profit to mother of 0.219/0.278 billion yuan, respectively, +20.6%/+11.2% year-on-year, respectively.

Development trends

Revenue is growing steadily. The company's 1H24 revenue increased 15.5% year over year. We believe that on the one hand, it is due to the continuous increase in the company's share, and on the other hand, to the contribution of new customers and new categories. By product, 1H24's revenue from environmentally friendly paper and plastic increased by 28.8% to 0.547 billion yuan, and revenue from fine paper packaging also increased 15.2% to 5.181 billion yuan. We expect the consumer electronics packaging business to continue to grow steadily, the cigarette label business may grow well under a low base, and the wine bag business has slowed down due to downstream manufacturers' inventory removal, but it is still growing steadily.

Profitability is stable. The company's 1H24 gross margin was 23.6%, the same year on year. Among them, 2Q24 gross margin was +1.4ppt to 24.9% year on year, and profitability increased in the second quarter. We believe it was mainly due to the recovery in capacity utilization and the decline in raw material prices. In terms of expenses, the company's expense ratio for the 1H24 period was +1.4ppt. Among them, sales, management, finance, and R&D expenses rates were +0.2/+0.9/+0.03ppt to 3.1%/6.9%/-0.2%/4.8%, respectively. The increase in financial expenses was mainly affected by exchange rate fluctuations. The company's net interest rate for 1H24 remained stable at 6.8% year-on-year.

Downstream demand has recovered, and attention is being paid to opportunities for changes in the industrial chain pattern. Since this year, consumer electronics demand has recovered due to new products such as smart wearables and folding screen phones. According to IDC data, global smartphone shipments increased 7.6% year-on-year in the first half of this year, and market expectations for some core customers have increased. We recommend focusing on how new technologies such as AI catalyze demand in the consumer electronics industry and expand the company's new customers. Furthermore, in recent years, the consumer electronics industry chain has moved out. For example, this year, India's Foxconn will participate in the production of the full range of iPhone 16 models. This is the first time it has produced a high-end model in India. In order to meet the trend of industrial chain transfer, Yutong follows customers to set up overseas factories. Overseas factories may have better profit levels under lower labor costs and a more moderate competitive environment. We are optimistic about the company's opportunities to increase its share through overseas layout under changes in the industrial chain pattern.

Profit forecasting and valuation

The profit forecast remains unchanged, and the current stock price corresponds to 12/10 times the price-earnings ratio. Maintaining an industry rating and a target price of 32.00 yuan, corresponding to the price-earnings ratio of 17/14 times in 2024/2025, respectively, there is 45% upside compared to the current stock price.

risks

Raw material prices fluctuated greatly, downstream demand fell short of expectations, and industry policy changed.