1H24 results are in line with market expectations
The company announced 1H24 results: 1H24 achieved operating income of 4.277 billion yuan, YoY +1.34%; realized net profit of 0.228 billion yuan, YoY +45.08%; realized net profit after deducting 0.222 billion yuan, YoY +77.47%, mainly affected by high amounts of non-recurring profits and losses such as government subsidies during the same period last year. Looking at a single quarter, 2Q24 achieved operating income of 2.206 billion yuan, YoY -0.29%, QoQ +6.48%; realized net profit of 0.113 billion yuan, YoY +17.03%, and QoQ -1.00%. The company's performance is in line with market expectations.
Development trends
Product restructuring ensures revenue growth, and profitability continues to improve. 1) 1H24's alloy structural steel/stainless steel/alloy tool steel/high temperature alloy products achieved revenue of 14.99/1.007/0.708/0.738 billion yuan, YoY +3.08%/+18.62%/+34.97%/-23.15%; the average sales price of products in each sector was YoY +14.06%/+3.89%/+6.46%/+16.76%. The company actively responds to insufficient demand and reduced production pressure in the Premium Steel market, vigorously develops new products and markets, and increases the order volume of alternative varieties of automobile steel. 2) 1H24's gross margin/net margin increased by 1.63/1.61ppt to 13.46%/5.33%, respectively. The impact of the reduction in raw material prices was evident, and the savings and efficiency of cost reduction increased significantly.
Inventories remain high, and cash flow from operating activities is under pressure in the short term. 1) The cost rate for the 1H24 company period was +0.15ppt to 8.24% year-on-year. Among them, the financial expense ratio was 0.49%, an increase of 0.25ppt year-on-year due to interest changes. 2) The company's 1H24 R&D expenses increased 0.78% year-on-year to 0.186 billion yuan. It has 49 research projects and completed the first trial production of 79 products. Many of these high-precision products have reached the international advanced level. 3) As of 1H24, the company's inventory size was 2.998 billion yuan, an increase of 18.15% over the same period last year. 4) The net cash flow from 1H24's operating activities was 0.259 billion yuan, a year-on-year decrease of 0.326 billion yuan. The main reason was the increase in high-end varieties with long production cycles as technology improvement projects were put into operation one after another, and the increase in cash expenses due to the increase in inventory used for process turnover.
Important technological transformation projects have been put into operation one after another, and Special Steel's leading position continues to be consolidated. 1) According to the company announcement, 1H24's important technological transformation projects have been put into operation one after another, and the delivery capacity of high-value-added products continues to improve; continuous optimization of the ingredient structure, improvement of yield, optimization of process routes, and energy cost reduction have increased significantly. 2) The company is a leading enterprise of deformed superalloys in China. We believe that as downstream demand in the industry increases, the company actively expands production and continues to optimize its product structure, and it is expected to continue to consolidate its leading position in special steels, and long-term growth can be expected.
Profit forecasting and valuation
We maintain our 2024/2025 profit forecast of 0.565/0.747 billion, and the current stock price corresponds to 2024/2025 18.2/13.7x P/E. We maintain our outperforming industry rating. Considering the recent decline in industry valuation, we lowered our target price by 14.9% to 6.44 yuan, corresponding to 22.5/17.0x P/E in 2024/2025, with a potential increase of 23.9%.
risks
1) Risk of rising raw material prices; 2) Risk of orders and deliveries falling short of expectations.