Incident: The company released its 2024 mid-year report on August 28. 1H24 achieved revenue of 1.73 billion yuan, YoY +18.1%; net profit due to mother 0.18 billion yuan, YoY +16.6%; net profit after deducting non-return to mother of 0.17 billion yuan, YoY +18.0%. The company's performance is basically in line with market expectations. The 1H24 subsidiary Xinlitong and Xi'an Steel Research have achieved rapid growth, which is the main driving force for the company's performance growth. Our comprehensive review is as follows:

2Q24 Revenue grew steadily; profitability improved. 1) Looking at a single quarter: 2Q24 achieved revenue of 0.93 billion yuan, YoY+10.3; net profit to mother of 0.085 billion yuan, YoY -9.6%; after deducting non-net profit of 0.08 billion yuan, YoY -11.8%. 2Q24 gross margin increased by 2.1ppt to 30.8% yoy; net margin increased 0.2ppt to 13.6% yoy. 2) Looking at the first half of the year: 1H24 gross margin increased 3.2ppt to 31.9% year over year; net margin increased 2.1ppt to 14.7% year over year. Profitability has improved.

Foundry alloy products have achieved rapid growth; Xinlitong and Xi'an Steel Research are the main drivers of growth. By business, 1H24:1) Foundry alloy product revenue was 1.24 billion yuan, YoY +38.0%; gross margin increased 6.3ppt to 34.5% year over year. 2) Revenue from deformed alloy products was 0.33 billion yuan, YoY -6.5%; gross margin increased 7.4ppt to 23.9% year-on-year. 3) Revenue from new alloy products was 0.15 billion yuan, YoY -23.7%; gross margin decreased by 25.5ppt to 28.9% year-on-year. Looking at subsidiary companies, 1H24:1) Steel Research Dekai achieved revenue of 0.36 billion yuan, YoY -28.3%; net profit of 0.045 billion yuan, YoY -30.0%; and net interest rate decreased by 0.3ppt to 12.4% year-on-year.

2) Xinlitong achieved revenue of 0.76 billion yuan, YoY +66.1%; net profit of 0.16 billion yuan, YoY +172.1%; net interest rate increased 8.2ppt to 21.0% year-on-year. 3) Xi'an Steel Research (registered in December 23) 1H24 achieved revenue of 0.13 billion yuan, full year revenue of 2023 0.11 billion yuan; 1H24 net profit of 0.035 billion yuan, net profit of the full year of 2023 0.021 billion yuan; 1H24 net profit of 27.1%, net interest rate of 19.2% in 2023. In summary, 1H24 Xinlitong and Xi'an Steel Research have achieved rapid development, which is the main driving force for the company's performance growth.

Strengthen independent research and development capabilities; actively prepare production and stock to meet strong downstream demand. In terms of expenses, the cost rate increased by 1.6ppt to 14.5% year-on-year during the 1H24 period, including: 1) The company increased its independent research and development efforts. R&D expenses increased 49.2% to 0.09 billion yuan year-on-year, and the R&D cost ratio increased by 1.1 ppt to 5.2% year on year. 2) Sales expenses increased 103% year-on-year to 0.033 billion yuan, mainly due to an increase in foreign market development expenses. By the end of 1H24, the company's inventory was 1.84 billion yuan, up 12.6% from the beginning of the year, mainly an increase in ground-breaking inventory for new projects; 0.33 billion yuan for projects under construction, an increase of 210% over the beginning of the year, mainly due to large fixed asset investment. The company actively prepares production and supplies to meet strong downstream demand. In addition, the company announced on June 29 that it intends to make up 0.28 billion yuan to the controlling shareholder China Steel Research and Technology Group, with an issue price of 12.83 yuan/share, which was approved by the shareholders' meeting on August 9.

Investment advice: The company is a leader in China's high temperature alloy products industry. It relies on the Steel Research Institute to maintain technological leadership and actively expand the aviation parts business to the downstream layout of the industrial chain, and is expected to fully benefit from the “two aircraft” boom. We expect the company's net profit from 2024 to 2026 to be 0.39 billion yuan, 0.49 billion yuan, and 60 billion yuan, respectively, with a corresponding PE of 27x/21x/17x. Maintain a “Recommended” rating.

Risk warning: downstream demand falls short of expectations; model batch production progress falls short of expectations; product price reduction, etc.