Incident: The company released its 2024 semi-annual report, achieving operating income of 1.401 billion yuan, a year-on-year increase of 6.39%, achieving net profit attributable to mother 0.2 billion yuan, an increase of 2.57% year-on-year, and realized net profit deducted from non-mother 0.188 billion yuan, a year-on-year increase of 2.75%.

Traditional market contraction is dragging down the growth of the main explosion-proof business, and safety, new fields, and foreign trade are expected to continue to contribute to growth elasticity.

(1) Growth: In the first half of 2024, the company's revenue increased 6.39% year on year, 2.57% year on year, and 2.75% year on year. The growth rate was lower than market expectations. The main reasons were: ① Due to the contraction of capital expenditure in traditional markets, new construction projects in the domestic traditional oil and gas chemical and mining explosion-proof markets declined; ② the professional lighting sector, affected by declining downstream demand and increased industry competition, achieved revenue of 0.095 billion yuan in the first half of the year, a year-on-year decrease of 17.94%. However, demand for industries/products in safety systems, new fields (grain, oil, medicine (liquor), military nuclear power, etc.), and foreign trade continued to increase. Among them, the foreign trade sector achieved revenue of 0.417 billion yuan in the first half of the year, an increase of 29.08% over the previous year. Looking forward to the future, the company will continue to reduce the share of traditional oil and gas chemical industries in revenue, increase the share of growing industries/products such as safety systems, grain, oil, medicine (liquor), and military nuclear power, and is expected to achieve long-term steady growth.

(2) Profitability: In the first half of 2024, the company's gross margin was 52.59%, down 4.8pct year on year, and the net profit margin was 14.41%, down 0.6 pct year on year. We determined that the main reason was the low gross margin EPC business (the gross margin of this business was about 25%) to secure revenue. The business achieved revenue of 0.127 billion yuan in the first half of the year, but there was no revenue in the same period last year, which led to a significant increase in its share in the overall revenue structure.

Explosion-proof appliances: ① Domestic trade: In the traditional petroleum industry, total capital expenditure has shrunk in the refining and chemical sector. Driven by the country's large-scale equipment renewal policy, investment in stock project renewal and upgrading is expected to increase; at the same time, market demand in downstream fine chemicals and other fields is gradually increasing, so the future outlook for traditional markets is not pessimistic; in addition, demand in new fields such as food, medicine, and liquor is strong. ② Foreign trade: Supply and demand in the international oil and gas industry have both increased. The company's rapid layout has successively set up and put into operation three overseas operation centers in Europe, Central Asia, and Southeast Asia. The company's joint venture subsidiary in Saudi Arabia has already been registered, and preliminary preparations such as project finalization will be carried out in the second half of the year, and it is expected to generate revenue next year. We believe that the company is ready to participate in global competition, and overseas markets will become the company's next major source of growth in the future.

Security system: It is an intelligent management and control system platform based on the Internet of Things, big data, 5G and other technologies. Since its launch in 2019, it has been upgraded three times, and the subsystems have been expanded from the original 8 to 10, and so far no peers can imitate it.

The November 2023 production safety policy brought about a high increase in demand for safety systems in the hazardous chemical park industry. The market size exceeds 10 billion dollars, and the company is expected to fully benefit. In addition, the company wholly acquired Sichuan Huanyu Zhongheng Technology Co., Ltd. in 2023. The company currently has a mature technical team of nearly 90 people matching security system technology, greatly enhancing the R&D, operation, maintenance and delivery capabilities of the company's intelligent safety systems business and further accelerating the company's strategic transformation. In the first half of 2024, the company successfully completed the installation, commissioning and project acceptance of the security intelligent lighting control system and supporting explosion-proof equipment at the production site invested by the global specialty chemical giant Yabao in Sichuan. Its technical strength and service capabilities were unanimously recognized by Yabao owners and EPC contractors.

Maintaining a “buy” rating: We expect net profit to be 0.545/0.628/0.739 billion yuan in 2024-2026, corresponding PE of 11/9/8 times, respectively. Maintain a “buy” rating.

Risk warning: There is a risk that the development of new fields falls short of expectations, that progress in overseas markets falls short of expectations, that the expansion of new businesses such as safety systems falls short of expectations, and that performance falls short of expectations based on certain assumptions.