The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 2.646 billion yuan, +4.96% year on year; net profit to mother 0.273 billion yuan, -61.80% year over year; net profit after deducting non-return to mother 0.238 billion yuan, -65.67% year on year. In 2024Q2, the company achieved operating income of 1.226 billion yuan, -2.82% YoY; net profit to mother 0.061 billion yuan, -83.91% YoY; net profit after deducting non-attributable net profit of 0.051 billion yuan, or -86.16% YoY. The company's profits are declining and profitability is under pressure. We believe that the main reason is phased overcapacity in the photovoltaic industry and declining prices in the industrial chain, leading to insufficient operating rates in the silicon wafer industry and pressure on industry profits. Looking to the future, in the context of clear production capacity in the industry, companies with strong alpha capabilities will be the first to rebound and gain a larger share, and profits will rise at the same time.

There is phased overcapacity in the photovoltaic industry, and profits are expected to improve. The company's gross margin for 2024Q2 was 19.00%, 31.40 pct year on month, -13.39 pct; net margin was 4.98%, -25.09 pct year on year, -9.93 pct month on month. The company's expense ratio for the 2024Q2 period was 14.66%, -2.20pct; of these, the sales expense ratio was 0.69%, -1.56pct; the management expense ratio was 8.02%, +1.31pct; the financial expense ratio was 0.83%, +0.27pct; and the R&D expense ratio was 5.11%, -2.23pct year on year.

Photovoltaic cutting equipment: leading technical strength, stable leading position. As of June 30, 2024, the total amount of orders in hand for the company's photovoltaic cutting equipment products was 1.293 billion yuan (tax included). In the first half of 2024, the company's photovoltaic cutting equipment business achieved revenue of 1.349 billion yuan, +66.95pct year-on-year, with a gross margin of 24.03%. As a leader in the photovoltaic cutting equipment industry, the company has occupied the vast majority of the photovoltaic cutting equipment market with its continuous leading competitive advantage. Despite the significant reduction in the scale of new production expansion in the photovoltaic industry and increasing competition, the company's photovoltaic cutting equipment continues to maintain the number one market share position with leading technical advantages.

Photovoltaic cutting consumables: leading in the thinning industry. In the first half of 2024, the company's photovoltaic cutting consumables business achieved revenue of 0.334 billion yuan, a year-on-year rate of -51.67 pct, and a gross margin of 24.12%. The company has always been leading the industry in promoting the iterative process of thinning diamond wire. In terms of carbon diamond wire, the company is leading the industry in introducing 30 μm and 28 μm wire types. Currently, it has supplied 34 μm, 32 μm, 30 μm and 28 μm wire in batches, and is actively reserving R&D tests for finer diamond wire. In terms of tungsten wire, the company introduced a cold drawing process for tungsten wire busbars in the industry, promoted breakthroughs in the thinning of tungsten wire busbars, led the industry to launch 21 μm linear tungsten wire, and achieved a rapid increase in the shipping scale of tungsten wire, and occupied a leading position in the industry.

Silicon wafer and cutting processing services: Market share is steadily increasing. In the first half of 2024, the company's silicon wafer and cutting processing service business achieved revenue of 0.75 billion yuan, -10.79pct year-on-year, with a gross margin of 20.03%. The company launched an industrialized layout in the cutting and processing of large photovoltaic silicon wafers in 2021. At present, it has fully implemented a production capacity of over 60 GW, which has achieved rapid release of high-quality and low-cost production capacity. “Cutting equipment+cutting consumables+cutting technology” has remarkable advantages in integrated development and closed loop technology. Specialized cutting capabilities are leading the industry. The silicon wafer cutting processing service business model continues to be recognized by the industry, and the market penetration rate is steadily increasing.

Investment advice: Based on the current phased and structural overcapacity in the photovoltaic industry, declining industrial chain prices and operating rate compression, we expect the industry to clear production capacity in 2024, and the high test has a strong alpha, which is expected to gain a larger share after production capacity is cleared, and profits are also expected to bottom up. Therefore, we expect the company to achieve net profit of 0.41, 0.43, 0.61 billion yuan to the mother in 2024-2026, corresponding to PE of 14, 14, and 10X. The company is a leader in the field of photovoltaic cutting and maintains a “buy” rating.

Risk warning: PV production capacity falls short of expectations, silicon wafer prices have declined, and market competition has intensified.