Incident: On August 30, Sanhuan Group released its 2024 semi-annual report. 1) First half of 2024: The company achieved revenue of 3.427 billion yuan, a year-on-year increase of 30.36%; realized net profit of 1.026 billion yuan, a year-on-year increase of 40.26%; realized net profit of 0.914 billion yuan after deduction, an increase of 60.46% over the previous year. 2) Q2 '24: The company achieved revenue of 1.864 billion yuan, an increase of 29.42% year on year; achieved net profit of 0.593 billion yuan, up 44.12% year on year; realized net profit of 0.535 billion yuan after deduction, an increase of 62.69% year on year.

The trend of economic recovery was established, and gross margin improved markedly. Benefiting from the recovery in downstream demand for consumer electronics and optical communications and the steady increase in market recognition of the company's MLCC products, 24Q2's revenue reached a record high in the single quarter, up 29.42% year on year, and net profit to mother in the single quarter increased 44.12% year on year. In terms of profitability, in the first half of 2024, the company's gross margin/net margin was 41.90%/29.95%, up 2.17pct/2.11pct, which was mainly a significant boost in the gross margin level of the electronic component materials business; 24Q2 was 43.37%/31.80% in a single quarter, up 3.38pct/3.23pct year-on-year, and 3.23pct. In terms of cost ratios, 24Q2's sales/management/R&D/finance expense ratios were -0.36pct/ -1.48pct/ -1.54pct/ +1.17pct year-on-year, and -0.17pct/ -0.17pct month-on-month, and -0.08pct/-0.16pct. While developing rapidly, the company continued to reduce costs and increase efficiency and improve operation management mechanisms.

Deep technology has consolidated the high added value foundation of products, and MLCC has plenty of momentum to improve quality and development. The company's products are widely used in many fields such as electronic components, optical communication, new energy, mobile smart terminals, etc., and various products dominate the global market. Among them, ceramic substrates and ceramic plugs for optical fiber connections won the title of the national manufacturing industry's single champion product and maintained a leading edge in the market; by product: 1) Electronic components and materials: achieved revenue of 1.444 billion yuan in the first half of 2024, an increase of 56.71% year on year, gross margin of about 39.82%, up 10.16 pcts year on year, and the revenue share increased to 42.14%, up 7.09 pcts year on year. Among them, the company's MLCC business broke through technical barriers such as powder atomization, thin layer layering, multi-layer technology, and high-precision equipment technology, and ultra-high capacity MLCC products won the 12th China Electronic Information Fair Innovation Gold Award. 2) New energy: The volume and weight power density of the company's next-generation ceramic fuel cell power generation system has increased by 30%. It is currently the SOFC system with the highest stand-alone power and power generation efficiency in China. 3) Optical communication components: The company grasped the trend of industry demand recovery, enriched and perfected product lines and supporting capabilities. In the first half of 2024, the company achieved revenue of 1.221 billion yuan, an increase of 30.99% over the previous year, and gross margin of about 43.53%, an increase of 1.59 pct over the previous year.

The strategic layout is clear, and independent innovation consolidates competitive advantage. In the first half of 2024, the company's R&D investment increased 13.03% year-on-year, continuing to promote the development of new products such as solid oxide fuel cells (SOFC) and promoting industrial transformation and upgrading. At the same time, the company strives to build regional R&D and talent centers in Southwest China and East China. Among them, the Chengdu Sanhuan Research Institute has been put into use, and the main structure of the Suzhou Sanhuan Research Institute project has been successfully capped. It will mainly undertake R&D and production of new electronic materials and components, focusing on developing advanced materials and products such as precision ceramic structural parts and functional parts for semiconductors to help solve core technical problems such as national key electronic component products and materials; at the same time, it will build a leading domestic advanced materials and component analysis and testing center to provide technical support for basic materials development and manufacturing.

Investment advice: Considering the recovery in the passive components industry, the downstream application fields of the company's MLCC products are becoming more and more extensive. We believe that the company's electronic components and materials business will continue to grow rapidly. The company's operating income from 2024 to 2026 is 7.168 billion yuan/8.803 billion/ 10.231 billion yuan, and the net profit to the mother is 1.964 billion yuan/2.467 billion yuan/2.98 billion yuan, as of August 30 Based on the closing price calculation, PE corresponding to 2024 to 2026 was 30.64 times/24.39 times/20.20 times, respectively, maintaining the “buy” rating.

Risk warning: Downstream market demand falls short of expected risk; industry competition increases risk; company's new business development progress falls short of expected risk.