Business was steady in the first half of the year, and the potential for performance growth is worth looking forward to

The company released its semi-annual report for 2012. 24H1 achieved operating income of 0.894 billion yuan, -11.42% year-on-year, and realized net profit to mother of 0.082 billion yuan, +0.39% year-on-year. Revenue declined and profits continued to grow slightly. We judge that the gross margins of the main businesses of design consulting, mechanical and electrical engineering, and equipment manufacturing have improved to varying degrees, mainly due to the contraction in the scale of engineering contracting and equipment manufacturing businesses. Looking at the single quarter, the company's revenue and net profit to mother in the 24Q2 single quarter were 0.536 and 0.048 billion yuan respectively, -7.97% and -0.62% year-on-year respectively.

Looking at the medium to long term, we believe that demand for granary construction and cold chain logistics still exists, the trend of high-end, intelligent, and green development in the grain and oil processing industry may continue, there is still room for improvement in the quality of company reports, and the potential for performance growth may be worth looking forward to.

The business structure is gradually being optimized, and there are still real needs for granary construction

By business, 24H1's design consulting, mechatronic engineering system delivery, and equipment manufacturing business achieved revenue of 0.22, 0.47, and 0.18 billion yuan, respectively, of -2.8%, +5.9%, and -34.6% year-on-year, with gross margins of 51.4%, 16.6%, and 22.2%, respectively, +6.65, +2.94, and +1.96pct, and general engineering contracting business revenue of 0.4 million yuan, or -99% year-on-year. Although revenue is under pressure, gross margins of all businesses have improved, driving overall profitability upward. From an industry perspective, in 2023, various grain enterprises in major production regions across the country acquired more than 0.2 billion tons of autumn grains, a record high since the reform of the corn storage system in 2016. Since the “14th Five-Year Plan”, the country has built, renovated and upgraded warehouses with a capacity of more than 65 million tons, and the efficiency and performance of green granaries have been continuously upgraded. We expect that in the future, China's granary construction will still have strong real needs, which is expected to support the company's performance and revenue growth.

Profitability has increased, and there is still room for improvement in cash flow

24H1's gross margin was 26.8%, +3.8pct year on year, and the cost ratio for the period was 15.2%, +2.8pct year over year. Among them, sales, management, R&D, and finance expenses were +0.27, +1.29, +1.03, and +0.20pct, respectively. Due to the decline in revenue, various expenses were not effectively diluted. 24H1's accrued asset and credit impairment losses totaled 0.007 billion yuan, a year-on-year decrease of 0.011 billion yuan. The net interest rate under comprehensive influence was 9.15%, +0.95pct year-on-year. The net CFO of 24H1 was -0.295 billion yuan, with a year-on-year increase of 0.1 billion yuan. The revenue ratio and payout ratio were +3.52 and +18.38pct year-on-year to 108.3% and 117.7%, respectively.

Focus on follow-up results and valuation catalysts, and maintain an “gain” rating

We believe that the construction of granaries and cold chain logistics are expected to remain high during the 14th Five-Year Plan period. At the same time, the company's gross margin may continue to benefit from an increase in the self-supply ratio of equipment. In the medium to long term, the company still has good investment value.

The company's net profit for 24-26 is estimated to be 0.27, 0.32, and 0.38 billion yuan respectively. As a subsidiary of a central enterprise under the COFCO Group, the company continues to make efforts in the field of grain and oil equipment. We are optimistic about the performance and valuation catalyst brought about by the subsequent market value management assessment by the State Assets Administration Commission and agricultural equipment updates, etc., and maintain the “increase in wealth” rating.

Risk warning: Ongoing order execution falls short of expectations, gross margin increase falls short of expectations, and project payback falls short of expectations.