1H24 results fall short of market expectations

The company announced 1H24 results: 1H24's operating income was 1.001 billion yuan, YoY -15.33%; realized net profit to mother 0.104 billion yuan, YoY -10.61%; realized net profit after deduction was 0.094 billion yuan, YoY -15.04%. Looking at a single quarter, 2Q24 achieved revenue of 0.423 billion yuan, YoY -32.00%, QoQ -26.74%; realized net profit to mother 0.048 billion yuan, YoY -26.82%, and QoQ -14.43%. The company's performance fell short of market expectations, mainly due to the impact of adjustments in the delivery pace of some domestic customers, which led to a decline in domestic aviation forging revenue.

Development trends

Some domestic customers adjusted the pace of delivery, and aviation forging revenue declined year-on-year, and overseas business performed well. 1) 1H24's aerospace/gas turbine/energy forgings achieved revenue of 7.57/0.055/0.094/0.015 billion yuan, YoY -9.24%/+5.48%/+68.87%/-91.97%; domestic/overseas revenue of 0.571/0.43 billion yuan, YoY -37.92%/+63.89%, respectively. Affected by factors such as adjustments in the delivery pace of some domestic customers, the company's domestic forging sales declined, and the gas engine and overseas markets performed well. 2) 1H24's gross margin/net margin was -1.64pp/+0.51ppt to 27.54%/10.31%, respectively. Product restructuring and a decline in revenue scale led to a decline in gross margin, and better cost ratio control led to an increase in net interest rate.

Focus on R&D investment to strengthen core competitiveness, and cash flow from operating activities continues to improve. 1) The 1H24 company's expense ratio was -1.20ppt to 11.58% year-on-year, and the cost ratio was better controlled against the backdrop of declining revenue scale.

2) The company's R&D expenses rate was +0.54ppt to 4.31% year on year. The company continues to increase investment in R&D of high-barrier forgings, and we believe it is expected to further enhance its core competitiveness. 3) The net cash flow from the company's operating activities was +0.161 billion yuan to 0.003 billion yuan year-on-year, an improvement. The increase was mainly due to the increase in the cash repayment ratio of accounts receivable due to the growth in foreign trade business. At the same time, the company strengthened inventory management and reduced raw material procurement expenses.

The process of issuing convertible bonds to expand production and increase efficiency went smoothly, and the on-hand orders were full, solidifying the foundation for growth. 1) In August 2024, the company completed issuing 0.667 billion yuan of convertible bonds. The capital raised is intended to be used for the construction project of a large-scale precision manufacturing industrial park for aviation and aerospace with an annual output of 3,000 tons. We believe that the company's market share is expected to increase further as production capacity construction progresses steadily. 2) According to the company announcement, according to customer order statistics, as of 1H24, the company still has a total number of active orders of 2.717 billion yuan, YoY +31.38%; according to the long-term agreement signed between the company and the customer and the production schedule confirmed with the customer, the amount of orders in hand during the Changxie period according to the corresponding price estimate is about 2.092 billion yuan. The company's total on-hand orders are about 4.809 billion yuan. We believe that the company is full of on-hand orders, and there is strong certainty about future long-term growth.

Profit forecasting and valuation

Considering the impact of some domestic customer delivery pace adjustments, we lowered our 2024/2025 profit forecast by 21.5%/25.5% to 0.236/0.307 billion yuan. The current stock price corresponds to 17.4/13.4xP/E 2024/2025. We maintained our outperforming industry rating and lowered our target price by 21.4% to 37.35 yuan, corresponding to 23.4/18.0x P/E in 2024/2025, with a potential increase of 34.4%.

risks

1) Macroeconomic environment and policy risks; 2) Product and order delivery falls short of expectations.