Q2 Performance is under pressure, and the market share of steel structures tends to increase. The company's 24H1 achieved revenue of 10.3 billion yuan, a decrease of 7%. The main reasons: 1) the company's large-scale intelligent transformation of production equipment in the first half of the year had an impact on output (24H1 production remained flat year on year); 2) the decline in steel prices led to a decline in the sales price of the company's products (24H1), the average daily price of hot-rolled coils in China was 3,974 yuan/ton, a decrease of 5.2%). 24H1 achieved net profit of 0.43 billion yuan, a decrease of 23%, and the decline in performance was greater than revenue. The main reasons were: 1) This round of increased investment in R&D began in the second half of last year and has continued to increase since then, 24H1 R&D expenses have increased year-on-year; 2) bad debt accruals have increased. 24H1 achieved net profit of 0.24 billion yuan after deduction, a decrease of 48% over the same period. On a quarterly basis, Q1/Q2 revenue YoY -12%/-3%, Q2 revenue decline narrowed; net profit to mother YoY +1%/-36%, respectively. In terms of profit per ton, net profit per ton calculated by 24H1 is 112 yuan, YoY-102 yuan, and Q1/Q2 is 95/125 yuan, YoY 61/-133 yuan, respectively. The decline in net profit per ton is expected to be mainly due to falling revenue, rising cost rates, and increased bad debts; among them, if R&D expenses are added back to net profit after deducting non-net profit, net profit per ton is 266/272 yuan, YoY+27/-94 yuan respectively. Currently, macro demand is weak. The company's steel structure production remained flat in the first half of the year, showing the resilience of leading businesses. The industry is gradually clearing up, and the company's market share is expected to increase.

Gross margin rebounded, expense ratios declined, and there was a slight net outflow of cash flow. 24H1's gross profit margin was 10.7%, YoY+0.06 pct, of which Q1/Q2 gross margin was 10.6%/10.8%, respectively, with a slight increase.

The cost rate for the period was 6.67%, YoY+1.76pct. Among them, the sales/management/R&D/finance expense ratios were YoY +0.03/+0.37/+0.27pct, respectively. Due to a decline in revenue and a certain degree of rigidity, all cost rates increased. Among them, the R&D cost rate increased significantly, mainly due to the increase in R&D investment in intelligent robots in the company's production line. Asset (including credit) impairment losses of 0.018 billion yuan, YoY +0.02 billion yuan, and bad receivables accruals increased. Income tax rate 17.8%, YOY+0.7pct.

Net profit margin 4.14%, YOY-0.85pct. The net cash outflow from 24H1 operating activities was 0.05 billion yuan, compared to a net inflow of 0.65 billion yuan in the same period last year. The net outflow is expected mainly due to: 1) the year-on-year decline in the company's revenue; 2) customer capital is tight, and payments have slowed down. The pay-to-cash ratio was 99%/96%, YOY+2/+14pct, respectively.

The intelligent transformation of production lines has been further advanced, and we will wait for subsequent results to be revealed. Currently, the company continues to increase investment in R&D to solve problems such as poor welding quality, labor difficulties, low efficiency, and environmental pollution in the steel structure manufacturing industry. In the first half of the year, the company's self-developed “arc welding robot control system” achieved phased success, and has been applied to the company's integrated lightweight welding robots and ground rail robot welding workstations. Currently, the company's top ten production bases have partially put into use lightweight welding robots and ground rail robot welding workstations. In terms of operating efficiency, the intelligent transformation of production lines is expected to help the company improve capacity utilization, improve quality, and reduce costs, and wait for subsequent results to gradually become apparent.

Investment advice: Based on the current economic situation and downstream demand trends, we adjusted and forecast the company's net profit for 2024-2026 to be 0.91/1.02/1.13 billion yuan, YoY -23%/+12%/+11%, respectively. The current stock price corresponds to PE of 8.9/7.9/7.1 times, maintaining a “buy” rating.

Risk warning: risk of capacity utilization falling short of expectations, risk of steel price fluctuations, risk of intelligent production line efficiency falling short of expectations, risk of increased competition, risk of bad receivables, etc.