Revenue was briefly pressured in the first half of the year. The Q2 performance achieved rapid growth. The company 24H1 achieved revenue of 9.073 billion yuan, or -15.15% year-on-year, and achieved 0.42 and 0.373 billion yuan of non-net profit, +22.4% and +27.5% year-on-year; Q2 achieved revenue of 4.172 billion yuan, -25.29% year-on-year, and 0.205 and 0.162 billion yuan, respectively. The high profit increase in Q2 in a single quarter was mainly due to a significant year-on-year improvement in gross margin. We expect the company to achieve net profit of 0.88, 1.01, and 1.15 billion in 24-26, corresponding PE of 8.8, 7.7, and 6.7 times, maintaining a “buy” rating.

Overseas business revenue grew rapidly, effectively driving an increase in overall gross margin.

By business, in the first half of '24, the company's general engineering contracting, product sales, and service businesses achieved revenue of 8.431, 0.495, and 0.131 billion yuan, respectively, -15.75%, -8.48%, and -0.49%, gross margins of 10.65%, 13.07%, and 47.01%, respectively. The gross margin of general engineering contracting was +3.21pct year-on-year. By region, overseas and domestic revenue was 4.687 and 4.386 billion yuan, +47.67% year-on-year, and gross margin was 12.53% and 10.32%, up 4.20 and +1.46pct year on year. Overseas business led to an increase in gross margin.

The company's overall gross profit margin in '23 was 11.5%, +2.75pct year on year, and the Q2 quarterly gross margin was 12.47%, +3.95pct year on year.

Overseas orders continue to rise, and there are sufficient orders in hand

24H1 signed a new contract amount of 9.699 billion yuan, +3.47% year over year. Among them, the domestic market development rate has slowed down; 1.589 billion new domestic orders were signed, which was -59.18%; new overseas orders were 8.11 billion, accounting for 83.62%. Overseas orders increased by 47.97% year on year. As of the first half of '24, the company has implemented unfinished projects with an estimated total revenue of 102.48 billion yuan, with sufficient orders in hand. The company's overseas business is concentrated in Russian-speaking regions, Africa, South America and the Middle East. It is deeply exploring traditional markets and actively expanding new customers such as India, Brazil, Peru, and Australia. The overseas market has great potential for growth.

Expense rates have increased year over year, and cash flow needs to be improved

The cost ratio increased 0.71 pct to 4.76% year over year during the 24H1 period, and the sales, management, R&D, and finance expenses rates were 0.30%, 3.57%, 1.54%, and -0.65%, respectively. The year-on-year change was +0.12pct, +1.17pct, +0.30pct, and -0.88pct. The decrease in financial expenses by 347.52% year-on-year was an increase in exchange earnings, and a 43.88% year-on-year increase in sales expenses was due to increased overseas market development. Asset and credit impairment losses were 0.049 billion, a year-on-year decrease 0.028 billion. Under the combined influence, 24H1 net interest rate was 4.84%, +1.47pct year on year, and single Q2 net margin increased 2.58pct year on year to 5.16%. The net CFO of 24H1 was -1.556 billion, with a year-on-year increase of 0.731 billion, and current payout ratios of 83.62% and 111.68%, respectively, +4.06 and +16.35 pcts year-on-year.

Risk warning: Order execution falls short of expectations; overseas political and economic uncertainty; project implementation falls short of expectations.