Matters:

The company's H1 revenue in 2024 was 3.427 billion (YoY +30.36%), net profit due to mother 1.026 billion (YoY +40.26%), net profit not attributable to mother 0.914 billion (YoY +60.46%), of which Q2 revenue was 1.864 billion (YoY +29.42%, QoQ +19.2%), net profit to mother 0.593 billion (YoY +44.12%, QoQ+ 36.86%), net profit not attributable to mother of 0.535 billion (YoY +62.69%, QoQ +41.63%) Comment:

The performance exceeded expectations, and Management Alpha was prominent. Q2 revenue grew strongly by 19.2% month-on-month. Strong revenue growth is expected to be driven by high-capacity MLCC volume and the recovery of data center connectors. Increased utilization rate and superposition structure optimization led to improved gross margin, and strong month-on-month growth in revenue and profit. Since 24Q1, along with the recovery and replenishment of downstream consumer electronics stocks, the MLCC industry has shown a recovery trend. As the recognition of downstream customers continues to increase, MLCC continues to expand. The downstream core business is mainly optical fiber and data centers. AI is driving the growth of the computing power data center market, and the plug-in business is expected to recover as a result. The paste substrate business is also expected to continue to recover, driven by inventory replenishment, and the overall business structure forms a hierarchical development pattern.

Structural optimization gradually increased gross profit margin, and the cost-leading strategy continued to advance. The gross profit margin for 24Q2 was 43.37%, a significant increase of 3.23pct over the previous month. The improvement in gross margin is mainly expected to be driven by increased MLCC utilization rate and high capacity volume. In terms of cost ratios, Q2 sales expenses/ management expenses/ R&D expenses/ financial expenses were 0.89%/4.79%/-3.04%, respectively, down 0.17/0.33/1.08/0.16pct, respectively. Strong gross profit repair combined with fee controls drove the net interest rate to 31.8%.

Looking ahead to H2 and '25, MLCC is expected to lead the company's continued recovery. AI server and end-side innovation are expected to drive MLCC into a new growth cycle. The company is actively increasing its share with high-capacity technology and cost leadership. The products are already widely used in consumer electronics, communications, automotive electronics, etc., and traditional downstream home appliances are also experiencing growth driven by overseas travel. In the future, along with the increase in high-capacity yield and self-control rate, gross margin is expected to continue to increase. PKG business companies are actively expanding their share with cost advantages, and gross revenue margin is expected to return to growth as demand recovers. The plug-in business is expected to continue to grow, driven by investment in AI computing power.

Profit forecast and investment suggestions: The Sanhuan Group's product hierarchy has improved mature, growing and emerging business layouts, advanced materials platforms have been built, and there is still huge room for growth against leading Japanese manufacturer Murata Kyocera. The company has fully proven its excellent management level and product competitiveness. Currently, passive components represented by MLCC have bottomed out and rebounded. Judging from multiple indicators of time span, channel inventory, and product price, the inflection point in the industry cycle has been established. Considering the recovery of industry sentiment and the company's business performance, we adjusted the company's 24-26 EPS forecast from 1.06/1.29/1.48 yuan to 1.17/1.47/1.68 yuan, combined with the company's own business strategy, with reference to the valuations of comparable companies such as China Porcelain Electronics/Fenghua Hi-Tech. Combined with the company's high historical average valuation and profit flexibility, consider entering a valuation switch for 25 years 25X target valuation, target price adjusted to 36.75 yuan, maintaining a “strong” rating.

Risk warning: Technology research and development falls short of expectations, production expansion falls short of expectations, and downstream demand falls short of expectations.