Event: The company released its 2024 semi-annual report. With 2024H1, the company achieved revenue of 6.807 billion yuan, +3.98% year on year; net profit to mother 0.147 billion yuan, or -39.3% year on year; net profit without return to mother 0.118 billion yuan, or -36.42% year on year. On a quarterly basis, with 2024Q2, the company achieved revenue of 3.84 billion yuan, +10.06% YoY, +29.44%; net profit to mother 0.083 billion yuan, -41.62% YoY and +30.16% month-on-month; net profit of 0.072 billion yuan after deducting non-return to mother, -25.17% YoY and +55.66% month-on-month.

24H1 review: CNC blade production increased 20% year on year, and upstream price increases eroded profits 1. 24H1's CNC blade production was 60 million pieces. 2024H1, the company's CNC blade production exceeds 60 million pieces, +20% compared to the same period last year. Affected by increased competition and rising prices of upstream raw materials, the stock diamond company did not increase profit. 24H1 achieved revenue of 0.989 billion yuan, +9.76% year over year, and net profit of 0.078 billion yuan, or -9.91% year over year.

2. 24H1 Jinzhou achieved an increase in net profit. Jinzhou achieved revenue of 0.515 billion yuan in 24H1, +10.48% year over year, and achieved net profit of 0.08 billion yuan, or +1.15% year over year, showing strong resilience.

3. Raw material prices rose, and 24H1's gross margin was -1.34pct year-on-year. The price of 24H1 tungsten concentrate was +12.8%, the price of ammonium paratungstate was +11%, and the market price of tungsten carbide powder was +9.13%. The price transmission of downstream traditional products was poor, resulting in the company's gross margin of -1.34pct year-on-year to 14.91%. By business, the gross margin of cutting tools and tools fell 2.32 pct to 30.94%; the gross margin of other hard alloys fell 0.64 pct to 12.66%; the gross margin of refractory metals fell 4.33 pct to 8.69%; and the gross margin of powder products increased by 0.21 pct to 8.61%.

24Q2 review: The cost side is dragging down performance

1. 2024Q2 net profit to mother year-on-year -0.059 billion yuan. Major profit increases: gross profit (+0.058 billion yuan), change in fair value (+0.026 billion yuan), other/investment income (+0.01 billion yuan). Main profit reduction items: expenses and taxes (-0.091 billion yuan, including R&D expenses increased by 0.04 billion yuan, sales expenses increased by 0.02 billion yuan, financial expenses increased by 0.02 billion yuan, management expenses increased by 0.01 billion yuan), impairment losses, etc. (-0.045 billion yuan), income tax (-0.014 billion yuan).

Core highlights: Kakizhuyuan Company will soon be injected to make up for shortfalls in resources 1. Kakizhuyuan will soon be injected. In January 2024, the company announced that it intends to acquire 100% of the shares of Kakizhuyuan Company held by the controlling shareholders Minmetals Tungsten Industry and Woxi Mining. In addition to Kakizhuyuan, the company currently hosts four other tungsten mines of the Minmetals Group (the total output of the mine managed in 2023 is 0.026 million tons). Once the injection is completed, the company will form a complete tungsten industry chain integrating mining, smelting, processing and trade.

2. Production of CNC blades and micro drills continues to expand. In terms of blades, the company adopted a “run fast” strategy. It is estimated that the company can produce 200 million CNC blades in 2025, and CAGR will reach 16.39% in 2021-2025. In terms of micro drilling, production is expected to continue to grow in the next few years. It is estimated that PCB micro drill production will reach 700 million units by the end of the 14th Five-Year Plan.

Investment advice: The company continues to increase tool and blade production capacity, tungsten ore is about to be injected, and the company's profitability is expected to continue to increase. We expect the company's net profit to be 0.417/0.564/0.748 billion yuan in 2024-2026 (not considering the increase in profit due to tungsten ore injection), and PE corresponding to the current price is 26/19/15 times, respectively, maintaining the “recommended” rating.

Risk warning: the project falls short of expectations; technology research and development risks; downstream demand falls short of expectations, etc.