Event: On August 22, 2024, China Catalyst released its 2024 semi-annual report. The company's revenue for the first half of 2024 was 0.396 billion yuan, up 67.00% year on year; net profit to mother was 0.096 billion yuan, up 145.89% year on year; after deducting non-net profit, it was 0.092 billion yuan, up 166.37% year on year. The corresponding company's 2Q24 revenue was 0.197 billion yuan, down 0.95% from the previous month; net profit to mother was 0.061 billion yuan, up 75.00% from the previous month.

Comment: Orders for main products increased, and the company's performance increased year-on-year. 1H24's special molecular sieve and catalyst/ non-molecular sieve catalyst segment revenue was 0.345/0.048 billion yuan, YoY was 86.66%/76.63%, respectively, and gross margin was 43.66%/11.39%, respectively. The main reason for the increase in the company's revenue and profit was the increase in orders for both molecular sieve and non-molecular sieve catalysts. According to the company's 2024 semi-annual report, the number of 1H24 BASF orders increased, and confirmed a 102.40% year-on-year increase in revenue. The company actively implemented product upgrades, and a new type of mobile source denitrification molecular sieve using the company's patented technology became the main growth point for the company's profit. In addition, the company actively promoted non-molecular sieve catalyst series products such as metal catalysts, and the order amount increased significantly over the same period last year. According to the company's plan to improve quality and efficiency, the company's metal catalyst products are expected to add 4-6 new customers in 2024.

1H24's sales expenses increased 15.11% year on year, sales expense ratio was 1.20%, down 0.54 pcts year on year; financial expenses decreased 39.79% year on year, financial expenses rate was -2.00%, up 0.39 pcts year on year; management expenses decreased 32.06% year on year, management expenses rate was 5.76%, down 8.39 pcts year on year; R&D expenses decreased 19.97% year on year, and R&D expenses were 5.31% year on year down 5.77 pcts year on year.

The net cash flows of the 1H24 company varied greatly. Net cash flow from operating activities of 1H24 was $0.037 billion, down 57.47% year on year; net cash flow from investment activities was -0.034 billion yuan, up 94.78% year on year; net cash flow from financing activities was -0.042 billion yuan, up 58.28% year on year; and the balance of cash and equivalent at the end of the period was $0.23 billion, up 25.33% year on year. Accounts receivable increased 24.36% year over year, and accounts receivable turnover increased, from 0.99 times in the same period in 2023 to 1.75 times; inventory fell 10.94% year over year, and inventory turnover increased, from 0.39 times in the same period in 2023 to 0.69 times.

The mobile source denitrification molecular sieve market prospects are good, and the company has updated products to expand its market advantages. Benefiting from increasingly stringent exhaust emission standards, emerging markets such as China, North America, India, Thailand, Europe, and South Africa will become the main incremental markets for global mobile source denitrification molecular sieves, and product demand can be expected to grow in the future. The company is deeply tied to major downstream customers, and the market advantage is obvious. According to the company's 2024 semi-annual report, the company's main customer is BASF, and BASF Global Mobile Source Denitrification Zeolite is mainly supplied by the company. According to the company's plan to improve quality and efficiency, the company's mobile source denitrification molecular sieve accounted for 30% of global sales in the first half of 2024. In addition, the company actively implemented product upgrades and launched a new type of mobile source denitrification molecular sieve using the company's patented technology to reduce the use of expensive template agents in the CHA structured molecular sieve production process and effectively reduce production costs. Against the backdrop that demand for mobile source denitrification molecular sieves is expected to grow, we are optimistic about the market share of the company's products and continuous upgrading. It is expected that the competitiveness of the company's mobile source denitrification molecular sieve market will be further strengthened.

Part of the fund-raising project has entered the trial production stage, and it is expected that it will gradually expand in the future. According to the company's 2023 annual report, the company's new environmentally friendly materials and intermediates projects include 3,300 tons/year for special molecular sieves and catalysts, 3200 tons/year for non-molecular sieve catalysts, 10,000 tons/year for fine chemicals, and industrial projects for specialty molecular sieves, environmentally friendly catalysts, and automobile exhaust purification catalysts, including 3,000 tons/year of special molecular sieves, environmentally friendly catalysts, and 1000 tons/year of automobile exhaust purification catalysts. According to the disclosure of the company's plan to improve quality and efficiency, the company's “industrialization of special molecular sieves, environmentally friendly catalysts, and automobile exhaust purification catalysts” project is currently in the trial production stage. Production is expected in October this year. The new environmentally friendly materials and intermediates project is in the civil construction phase and will be actively promoted in accordance with the company's project plan. We are optimistic about the gradual expansion of the company's fund-raising projects, which are expected to contribute to the company's performance in the future.

Investment advice: We expect China Catalyst's 2024-2026 revenue to be 0.816/1.025/1.234 billion yuan, respectively, up 48.4%/25.5%/20.5% year-on-year, and net profit to mother of 0.183/0.225/0.265 billion yuan, respectively, up 138.5%/22.9%/17.5% year-on-year, and corresponding EPS of 1.04/1.28/1.50 yuan respectively. Combined with the company's closing price on August 26, the corresponding PE was 19/15/13 times, respectively. Based on the following two aspects: 1) we are optimistic about the market share of the company's products and continuous upgrading. We expect the competitiveness of the company's mobile source denitrification molecular sieve market to be further strengthened; 2) we are optimistic about the gradual expansion of the company's fund-raising projects, which are expected to contribute to the company's performance and maintain a “buy” rating in the future.

Risk warning: Risks caused by failure to maintain advanced technology and processes, risk of failure in new product development, risk of downstream customer economic cycle changes, risk of customer concentration risk, risk of gross margin fluctuation, risk of bad accounts receivable, risk of falling inventory prices and low turnover, risk of traditional fuel vehicle market being overwhelmed by new energy vehicles, and environmental protection risks.