1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 0.58 billion yuan, +8.7% year-on-year; net profit to mother of 60.09 million yuan, or -44.6% year-on-year. The insufficient capacity utilization rate for new projects compounded by reduced government subsidies, and the performance fell short of our expectations. The 2Q24 company achieved revenue of 0.32 billion yuan, +26.7% year-on-year; net profit to mother was 30.24 million yuan, or -38.4% year-on-year, mainly due to a decrease of 9.2 million yuan in other revenue in 2Q24.

The growth rate of tungsten carbide products is better, and the growth of CNC blades is weak. By business, 1H24's CNC tools achieved revenue of 0.32 billion yuan, or +3.66% year over year. We think it was mainly driven by overseas growth, and domestic demand was relatively lackluster; hard alloy products achieved revenue of 0.25 billion yuan, +14.35% year-on-year. We think it was mainly driven by the volume of bars released and put into production in the increase project.

Gross profit margin and cash flow picked up sequentially in the second quarter. 2H24's gross margin was +2.1ppt to 26.1% month-on-month. The rise in production capacity for new projects affected the gross profit margin to a certain extent, but there was an improvement trend compared to the second quarter. 1H24's sales/management/R&D/finance expense ratios were -0.1/-1.0/+2.3/+1.9ppt to 3.4%/3.5%/6.9%/1.3%, respectively. The increase in R&D expenses was mainly due to the increase in personnel.

The 2Q24 operating cash flow was 26.72 million yuan, showing a significant recovery from -0.13 billion yuan in the first quarter.

Development trends

The advantages of going overseas are obvious, and production capacity flexibility for new products is yet to be released. 1) Expected to go overseas: 1H24 achieved revenue of 0.115 billion yuan overseas, +94.67%. Among them, CNC blades achieved revenue of 97.07 million yuan, +117.9% over the same period, and the average overseas price reached 11.83 yuan/piece. We believe that compared with comparable companies in the industry, Oukeyi showed a strong overseas advantage. The company has initiated the registration process for a German subsidiary. We believe that overseas business development will continue to gain strength; 2) Production capacity for new products is about to be released: the company's new projects are entering the production stage one after another. The company expects new products such as high-efficiency cutter series, overall tool series, and rough boring tools to enter the volume stage in the second half of the year. We anticipate or drive scale effects to reduce capital expenditure pressure on production lines.

Profit forecasting and valuation

Considering weak downstream demand compounded by weakening profitability that fell short of expectations, we lowered our 2024-2025 net profit by 16.6%/21.7% to 0.16/0.18 billion yuan. The current stock price corresponds to the 2024-2025 P/E 16.4/14.6x, respectively. We simultaneously lowered our target price by 20% to 20 yuan, corresponding to the 2024-2025 P/E of 20/18x respectively. Currently, there is room for a share price increase of 24.6%, maintaining the “outperforming industry” rating.

risks

Demand in the manufacturing industry is under pressure, and the competitive landscape has deteriorated.