1H24 results are in line with market expectations

The company announced 1H24 results: revenue of 0.713 billion yuan, -10.63% YoY; net profit after deducting non-return to mother 0.065 billion yuan, -66.11% YoY, in line with market expectations. 2Q24 company: revenue of 0.458 billion yuan, +26.8% year over month, +79.2% month on month; net profit after deducting non-return to mother 0.023 billion yuan, -55.8% year on year, +76.1% month on month.

Losses in the foundry business reduced overall profit performance, profits in the forging business were basically stable, and other precision shaft businesses accelerated customer development. 2Q24 showed a significant month-on-month increase in wind power product shipments. We estimate that the company's forging spindle business continues to maintain a high level of profit. The foundry business was affected by the declining production capacity of the Dongying base (Jinlei Heavy Equipment). 1H24 recorded an overall operating loss of 58 million yuan. Due to 2Q24's rapid month-on-month growth in foundry product shipments, the overall gross margin of the company was lowered to 19.3%, -17.4ppt year-on-year, and -4.6ppt month-on-month. Furthermore, for other precision shaft businesses, the company continues to expand domestic and foreign customers, driving rapid revenue growth. The company's 1H24 other precision shaft business achieved revenue of 0.16 billion yuan, a year-on-year increase of 40.1%, and a gross margin of 31.2%, or 5.6ppt year-on-year.

Development trends

The pace of delivery of 2H24 wind power products is expected to accelerate further, and foundry business profits are expected to gradually improve.

Delivery of 2Q24's wind power products has shown a clear month-on-month acceleration. We expect the industry to enter the project construction phase intensively starting in 3Q24, and the company's delivery pace is expected to accelerate further in the second half of the year. At the same time, considering the recent weakening in raw material prices, we expect an improvement in the company's overall delivery profitability in the second half of the year. The production capacity of the company's Dongying base is gradually climbing, and currently, the company's foundry business profits are expected to gradually improve as overseas customer development continues to advance. With the gradual increase in capacity utilization and further optimization of the delivery product structure, the company's foundry business profit is expected to gradually improve. In addition, the company continues to develop its free forging business, and announced plans to further expand forging production in April 2024. We expect that the free forging business is also expected to become another growth pole for the company's revenue in the future.

Profit forecasting and valuation

Considering that the pace of production capacity investment at the company's Dongying base was slightly slower than expected, we lowered our 2024/2025 net profit forecast by 16.9%/8.6% to 0.403 billion yuan/0.577 billion yuan, respectively. The company's current stock price corresponds to 13.1/9.2 times the price-earnings ratio for 2024/2025. As domestic and foreign wind power industry demand gradually enters an upward cycle, we continue to be optimistic about the incremental profit elasticity brought about by the release of the company's large megawatt casting and free forging production capacity, and lowered the company's target price by 6.6% to 22.31 yuan, corresponding to the 2024/2025 price-earnings ratio of 17.7 times/12.4 times. There is 34.7% upward space compared to the current stock price.

risks

Prices of raw materials have risen; demand in the wind power industry has fallen short of expectations; new capacity construction progress and customer development progress have fallen short of expectations.