Incidents:

On August 29, 2024, Titan Technology released its 2024 semi-annual report: the first half of 2024 achieved operating income of 1.396 billion yuan, a year-on-year increase of 5.13%; realized net profit of 0.005 billion yuan, a year-on-year decrease of 89.90%; realized net profit of 0.006 billion yuan without deducted return to mother, a year-on-year decrease of 85.22%; gross sales margin of 19.69%, a year-on-year decrease of 3.17 pcts; net sales margin was 0.28%, a year-on-year decrease of 3.66 pcts ; At the end of the first half of 2024, the company's inventory amount was 1.08 billion yuan, up 9.88% year on year; the company's net cash flow from operating activities in the first half of 2024 was -0.075 billion yuan.

In the 2024Q2 single quarter, the company achieved operating income of 0.732 billion yuan, +8.81% YoY, +10.23%; realized net profit of 0.003 billion yuan, -89.00% YoY, +20.88% month-on-month; net profit of 0.004 billion yuan after deducted to mother, -78.56% YoY, +90.11% month-on-month; gross sales margin was 18.69%, 4.42 pcts YoY, -2.11 pcts month-on-month; Net sales margin was 0.37%, YoY -3.50 pcts, month-on-month +0.20 pcts; at the end of the 2024Q2 quarter, the company's inventory amount was 1.08 billion yuan, +9.88% YoY, +2.12% month-on-month; net cash flow from operating activities was 0.061 billion yuan, which changed from negative to positive YoY.

Investment highlights:

Competition in the industry intensifies, and the company's 2024H1 performance is under pressure

Affected by the lack of increase in downstream demand, downstream customers reduced costs and increased efficiency, leading to increased competition in the industry.

In the first half of 2024, the company achieved revenue of 1.396 billion yuan, an increase of 5.13% over the previous year.

By product sector, research reagents achieved revenue of 0.578 billion yuan, gross profit of 0.178 billion yuan, gross profit margin of 30.84%; specialty chemicals achieved revenue of 0.46 billion yuan, gross profit of 0.027 billion yuan, gross profit margin of 5.82%; scientific research instruments and consumables achieved revenue of 0.355 billion yuan, gross profit of 0.068 billion yuan, gross profit margin 19.20%; laboratory construction and research information technology services achieved revenue of 0.004 billion yuan Yuan, gross profit 0.002 billion yuan, gross profit margin 48.39%.

In the first half of 2024, the company achieved net profit of 0.005 billion yuan, a year-on-year decrease of 89.90%. This was mainly affected by the reduction in the company's gross margin to cope with competition in the stock market and ensure an increase in market share and sales revenue growth. In the first half of 2024, the company's sales expense ratio was 7.06%, -0.34 pcts year on year, mainly due to the company's optimized operation and personnel control; the management expense ratio was 4.94%, +0.65 pcts year over year, mainly due to the increase in various support expenses brought about by the company's sales scale; the R&D cost rate was 5.45%, -0.10 pct year on year. The company strengthened R&D investment around “deep” technology and “deep” application, invested in product development and technology accumulation, and R&D expenses remained stable; the financial expense ratio was 1.24%, year on year + 0.47 pct, mainly due to increased interest due to the company's short-term loans and long-term loans for construction projects. At the end of the first half of 2024, the company's inventory amount was 1.08 billion yuan, an increase of 9.88% over the previous year, mainly due to the company actively preparing goods according to market conditions to ensure timely response to downstream customer needs. The company's net cash flow from operations and production in the first half of 2024 was -0.075 billion yuan, mainly because the company's business model consumed a lot of capital and took up more operating capital in accounts receivable and inventory, so operating cash flow was negative. At the same time, the company continued to optimize the use of funds and management of accounts receivable and payable, and negative cash flow was reduced.

Actively promote the development of independent brand products, and continue to improve core technology. The company mainly provides scientific research reagents, specialty chemicals, scientific research instruments and consumables, laboratory construction and scientific research informatization services. Currently, the company sells more than 6.6 million product SKUs and has multiple independent brands. In the first half of 2024, the company strengthened investment in product technology and continued to advance technology around synthetic reagents, biological reagents, high-purity reagents, small instruments and platforms. Independent brands continue to launch new products in product lines such as inhibitors, protease reagents, antigen antibodies, cytokines, biochemical buffers, and ion exchange resins, ensuring the core competitiveness of their own brands. In the first half of 2024, the company invested 79.8021 million yuan in R&D, accounting for 5.71% of R&D investment. As of June 30, 2024, the company has obtained a total of 193 patents and software copyrights (within the validity period), including 64 invention patents.

Adhere to the dual-core drive strategy and continuously improve our competitiveness

The overall field of scientific research in China started relatively late. With the support of national policies for independent innovation by technology-based enterprises, China's scientific research expenditure has maintained rapid growth, which has also driven the rapid development of the domestic scientific service industry. The company is a leading enterprise in the domestic scientific service industry. The company adheres to a dual-core drive strategy and continuously enhances its competitiveness around product technology research and industry infrastructure construction. In the first half of 2024, the company's Songjiang operation base was put into use, centrally managing warehouses in East China to effectively improve the efficiency of warehousing operations; the Anhui Tiandi High Purity Solvent Manufacturing Base was put into use to develop a series of products; the Yichang R&D and manufacturing base and Fengxian Life Science headquarters are progressing steadily according to the plan. At the same time, the company acquired companies such as Rundu Biotech, Maigao Instrument, and Qinxiang Instrument in the first half of the year. Through investment and mergers and acquisitions in segmented fields, the company leverages its R&D and manufacturing advantages, and the integration effect is expected to gradually be realized.

Profit forecasts and investment ratings estimate that the company's revenue for 2024-2026 will be 2.954, 3.409, and 4.192 billion yuan, respectively, and net profit to mother will be 0.019, 0.063, and 0.144 billion yuan, respectively, corresponding to PE 140.02, 42.90, and 18.66 times, respectively. The company adheres to the dual-core driving strategy, actively promotes the development of its own brand products, and the SKU category continues to expand. The company is expected to use its platform advantages to increase its market share year by year and grow rapidly. First coverage, giving a “buy” rating.

Risks suggest that new product development falls short of expectations; regional expansion falls short of expectations; industry competition pattern deteriorates; domestic substitution process falls short of expectations; environmental protection and production safety risks.