Event: The company released its 2024 semi-annual report. 2024H1 revenue was 0.731 billion yuan, +6.07% year over year; net profit to mother was 0.191 billion yuan, +7.11% year over year; net profit without return to mother was 0.192 billion yuan, +11.38% year over year. Looking at a single quarter, 2024Q2's revenue was 0.382 billion yuan, +6.41% YoY, +9.07%; net profit to mother was 0.101 billion yuan, +5.68% YoY, +10.68% month-on-month; net profit without return to mother was 0.102 billion yuan, +8.71% YoY, +13.34%.

Profit statement: Deformed superalloys are the main source of revenue growth for the company, and profitability is increasing steadily. On the revenue side, 2024H1 cast superalloy revenue was 0.279 billion yuan, -19.45% year over year, modified superalloy revenue 0.277 billion yuan, +30.79% year over year, specialty stainless steel revenue 0.039 billion yuan, -5.40% year over year, and other alloys revenue 0.088 billion yuan, +21.13% year over year. On the profitability side, 2024H1's gross profit margin was 38.34%, +1.13pct year on year. Among them, the gross margin of cast superalloy/deformed superalloy/special stainless steel/other alloy changed +5.21/1.39/1.09/0.80pct, respectively. The gross margin of cast superalloy increased significantly or due to changes in product structure, the net profit margin remained stable at 26.16%, +0.26pct year on year.

Balance sheet and cash flow statement: Multiple balance sheet items indicate that the company is expected to experience continued growth and a significant improvement in net operating cash flow. 1) Advance payments: 2024H1 was 0.01 billion yuan, up 663.61% from the beginning of the year, indicating that the company increased procurement of raw materials; 2) Contract liabilities: 2024H1 was 0.014 billion yuan, up 64.84% from the beginning of the year, indicating an increase of 64.84% of the company's orders in hand; 3) Notes payable and accounts payable: 2024H1 was 0.223 billion yuan, up 9.10% from the beginning of the year, indicating that the company increased procurement of raw materials; 4) Net cash flow from operating activities: 2024H1 Significant improvements were achieved at 0.231 billion yuan (2023H1 was -0.066 billion yuan).

As an excellent domestic superalloy private enterprise, Tunan Co., Ltd. will fully benefit from the steady growth of the domestic aviation development industry and increased demand for gas turbines and nuclear power in the future. Furthermore, the company has achieved product expansion through two major subsidiaries in Shenyang, further opening up space for the company's growth.

1) Precision castings and superalloy materials have fully benefited from the steady growth of the domestic aviation industry and increased demand for gas turbines, nuclear power, etc. 2024H1 casting superalloy revenue was -19.45% compared to the same period, or due to the removal of inventory by downstream aviation assembly units (2022, 2023, and 2024Q1 aviation engine inventories were 25.734, 29.663, and 36.307 billion yuan, respectively). The company's parent alloys and precision castings are expected to continue to be used in new aviation development models in the future. Furthermore, gas turbines, nuclear power, etc. will bring additional demand to the company.

2) The Shenyang subsidiary helps the company expand its categories. Under the development idea of “small core and big collaboration” of the Aviation Development Group, the company established a wholly-owned subsidiary, Shenyang Tunan/Tunan Intelligent Manufacturing, which specializes in small and medium-sized aviation components. Among them, Shenyang Tunan expects to achieve revenue from small to medium aviation components by the end of 2024 or early 2025. The Tunan intelligent manufacturing project is under construction, and some production line equipment has already been installed, tested, accepted and transformed one after another.

Investment advice: Considering the slowdown in 2024H1 performance growth due to industry factors, we expect the company's net profit to be 0.386, 0.476, and 0.589 billion yuan respectively from 2024 to 2026, corresponding PE is 23X, 19X, and 15X, maintaining a “buy” rating.

Risk warning: Downstream demand, new business progress falls short of expectations, and raw material prices fluctuate.