Incident: On August 26, 2024, the company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 1.295 billion yuan (+28.50% year over year) and achieved net profit of 0.404 billion yuan (+16.79% year over year). After deducting the impact of exchange profit and loss, net profit to mother increased 30% year on year. Of these, 24Q2 achieved operating income of 0.664 billion yuan (+30.98% YoY, +5.18% YoY) and net profit of 0.235 billion yuan (YoY +10.75%, +38.90%).

Adsorbent materials are the core driver of the company's performance growth. 2024H1 has maintained steady growth, and profitability has improved. 2024H1 adsorption materials achieved revenue of 0.974 billion yuan, an increase of 32.84% year-on-year, mainly benefiting from strong downstream demand and strong production and sales of adsorbent materials. Production and sales increased 27% and 35% year-on-year to 0.0316 million tons and 0.0308 million tons, respectively. All downstream fields of adsorption materials showed a good growth trend during the reporting period. Specifically, (1) the water treatment and ultra-purification sector 2024H1 achieved revenue of 0.323 billion yuan, an increase of 30% over the previous year. The increase was mainly due to a further increase in product market penetration. The company has formed long order contracts with leading customers in the high-end drinking water market, and the localization process of chip manufacturing and panel companies in the ultrapure water market continues to be promoted, leading to a further increase in market share; (2) Life sciences sector 2024H1 achieved revenue of 0.285 Billions of yuan, an increase of 33% over the previous year, mainly benefiting from a sharp increase in sales of downstream GLP-1 polypeptide drugs. The company's important customer Lilly has raised its annual revenue forecast by 3 billion US dollars due to strong demand for the peptide drug tirpopeptide. As its core supplier of solid phase synthesis carriers, the life science sector is expected to continue its growth trend. At the same time, domestic and foreign customer projects continue to increase, and the steady progress of clinical phase 2 and 3 projects is also expected to bring new incremental space for the company's life science sector's performance growth; (3) The metal resources sector 2024H1 will achieve revenue 0.121 billion yuan, up 45% year on year, mainly due to the upward trend in the industry. Market prices for gallium and uranium rose compared to the same period last year. The company continued to promote domestic substitution and accelerated product sales in the field of uranium extraction; (4) The energy saving and environmental protection sector stabilized sales of products and technology related to CO2, VOCs, and industrial wastewater treatment during the reporting period, driving the growth of sector performance. 2024H1 achieved revenue of 0.104 billion yuan, an increase of 18% over the previous year; (5) In the chemical and catalytic sector, ionic membrane caustic soda and polycrystalline silicon boron removal products were maintained during the reporting period With good sales, 2024H1 achieved revenue of 0.097 billion yuan, a year-on-year increase of 44%; (6) The food processing sector achieved revenue of 0.025 billion yuan in 2024H1, an increase of 40% over the previous year. In addition, the profitability of adsorption materials increased markedly during the reporting period, and gross margin increased by 1.5pct to 51.0% year over year, mainly due to an increase in the share of high-value-added businesses such as life sciences, metal resources, and ultrapure water, highlighting the company's high technical barriers and core competitiveness.

Revenue from system installations has been growing steadily, and the contribution of lithium extraction from salt lakes has remained stable. The 2024H1 system achieved revenue of 0.289 billion yuan, an increase of 38% over the previous year. Among them, the revenue of the salt lake lithium extraction system was 0.099 billion yuan, an increase of 8% over the previous year, and the revenue of the system installation after deducting lithium extraction in Salt Lake was 0.19 billion yuan, an increase of 61% year on year. Furthermore, the gross margin of system devices during the reporting period was 35.85%, down 9.28 pcts from the same period last year. The company continues to lead the market in the salt lake lithium extraction field. SDIC's potassium project was successfully delivered in the first quarter. By the end of June 2024, the company had completed and implemented more than 15 industrial salt lake lithium extraction projects, with a total production capacity of nearly 0.1 million tons of lithium carbonate/lithium hydroxide, 6 of which were successfully put into operation. According to investor exchange records on May 22, 2024, the current contract amount for the salt lake lithium extraction sector with unconfirmed revenue is greater than 1.1 billion yuan. As the Salt Lake lithium extraction project is gradually delivered and revenue confirmation is completed, the Salt Lake lithium extraction system device is expected to continue to provide positive contributions to the performance.

Adhering to the internationalization strategy, overseas business is growing at an impressive rate. During the reporting period, the company achieved overseas sales revenue of 0.352 billion yuan, a sharp increase of 56% over the previous year. This is mainly due to the company's continuous deployment of overseas marketing and technical support networks, and the gradual increase in product penetration in overseas markets in recent years. At present, the company's overseas markets have expanded to cover North America, Europe, Asia, South America, Africa and other regions. As the company continues to explore overseas markets and advance the internationalization process, the overseas business is expected to continue its good growth trend.

Gross margin is generally stable, and net profit margin is affected by exchange gains and losses. 2024H1's gross margin was 47.48%, a slight decrease of 0.43pct year-on-year, and remained stable. The net interest rate for the reporting period was 31.65%, down 2.94 pcts year on year, mainly due to the 2.20 pct year-on-year increase in the cost ratio for the period to 12.09%. Among them, the financial rate increased by 4.15 pct year-on-year, mainly due to a decrease in exchange earnings and an increase in interest expenses during the reporting period.

Lay out high-end production capacity to help seize industry development opportunities. In 2020, the company built Gaoling Industrial Park and Pucheng base, adding a total production capacity of 0.04 million tons/year of adsorption and separation materials, of which 0.025 million tons of Gaoling New Materials Industrial Park is a special product line, and 0.015 million tons of Pucheng New Materials Industrial Park is a major application category. On July 30, 2024, the company's shareholders' meeting passed the “Proposal on Wholly-owned Subsidiaries to Purchase Land Use Rights and Invest in the Construction of High-End Material Manufacturing Industrial Parks”. The wholly-owned subsidiary Pucheng Lanxiao plans to purchase land use rights to build 0.02 million tons of high-end materials production capacity. The new production capacity plan is mainly used for high-value-added varieties such as ultrapure water and food. Facing strong downstream demand, the company responds positively to the market and selects high-value-added varieties in a targeted manner to expand production capacity. The high-end production capacity layout is expected to provide a solid guarantee for the company's performance growth, and at the same time help the company seize the industry window period and further increase its market share.

Investment advice: We expect the company to achieve operating income of 3.226/4.037/5.023 billion yuan in 2024/2025/2026, up 29.61%/25.14%/24.44% year-on-year, and achieve net profit of 0.972/1.257/1.574 billion yuan, up 35.59%/29.30%/25.20% year over year. The current stock price corresponding to 2024/2025/2026 PE is 19.78/15.30/ 12.22X, considering that the company is a leading platform-based adsorbent material company, the various business segments resonate with a remarkable upward trend, have outstanding growth, and maintain a “highly recommended” rating.

Risk warning: market competition risk; risk of changes in downstream application areas; risk of loss of core technical personnel and technology leakage.