Matters:

The company released its 2024 semi-annual report: in the first half of the year, revenue of 0.579 billion yuan, +8.75%; net profit to mother was 0.06 billion yuan, or -44.58%; in the first half of the year, the company achieved revenue of 0.321 billion yuan, up 3.66% year on year; hard alloy products achieved operating income of 0.254 billion yuan, up 14.35% year on year.

Q2 achieved revenue of 0.315 billion yuan, +26.73% YoY; net profit to mother 0.03 billion yuan, or -38.45% YoY.

Commentary:

Revenue increased in the first half of the year, and profits were under pressure in the short term. The increase in revenue was mainly due to the company's exports and the commissioning of new projects to generate batch revenue, etc. The decline in profits is mainly due to: 1) new projects are in the production capacity release phase and product capacity utilization rates have declined, leading to an increase in operating costs; 2) financial expenses and R&D expenses have increased; 3) raw material prices have increased.

Volume and price: The volume price of tools is expected to rise rapidly, and production capacity for new products will gradually be released. As an important consumable in the manufacturing industry, the boom in the manufacturing industry has a great impact on tool demand. Currently, there is a large difference in tool prices at home and abroad. Domestic tool products are being iteratively upgraded, the variety of products is becoming more and more diverse, and the prices of middle and high-end tools are showing an upward trend. 1) Yanling base project: After increasing the production capacity of the project, the company's theoretical production capacity of CNC blades reached 0.13 billion pieces. 2) Industrial Park Project: The company completed fixed capital raising for the construction of a CNC tool industrial park in 2022. It mainly lays out businesses such as bars, overall tools, CNC tools, and metal-ceramic blades. The revenue contribution of the new layout products in 2023 is small, and new products such as overall tools are expected to contribute significantly to the 2024 performance.

Complete package: Increase the terminal layout and broaden the application scenarios of the overall solution. Promoting overall solutions is an important way for domestic tools to reach the high-end. On the one hand, the company actively broadens the overall solution application scenarios and launched tool processing solutions for automobile manufacturing parts, aerospace (chassis, blades, etc.), rail transit (turnouts, axles, wheels, etc.), wind power (flanges, planetary wheels, etc.), and mobile phone frames; on the other hand, the company actively enriches the product system and expands the product needs of existing customers.

Exports: Domestic knives are “good-quality and inexpensive”, and overseas exports have increased significantly. The company's overseas sales increased from 0.026 billion yuan to 0.14 billion yuan in 2017-2023, with a CAGR of 32.73%. In the first half of the year, the company's overseas sales revenue was 0.115 billion yuan, up 94.67% year on year. Among them, the export revenue of CNC tool products reached 0.097 billion yuan, an increase of 117.94% year on year, with an average price of 11.83 yuan/piece. With the advantage of “good quality and low price”, overseas business has achieved rapid growth. There have been new breakthroughs in adding overseas brand agents, increasing the number of overseas customers, and overseas distribution sales in Europe and the US. Overseas business growth can be expected in 2024.

Investment advice: Considering the manufacturing boom and raw material price increases in the first half of 2024, we lowered the company's profit expectations. The company's revenue for 2024-2026 is 1.284, 1.554, and 1.899 billion yuan, respectively, and net profit to mother is 1.66 (previous value 2.25), 2.58 (previous value 3.14), and 0.361 billion yuan (previous value 4.41), and corresponding EPS is 1.05, 1.62, and 2.27 billion yuan, respectively. Referring to the valuation level of comparable companies, based on factors such as the company's leading domestic tool company, positive progress in domestic and overseas business and overall solution models, the gradual release of production capacity in fixed increase projects, and the recovery in manufacturing sentiment, the target price was adjusted to 24.15 yuan, maintaining a “strong push” rating.

Risk warning: The recovery in the manufacturing industry falls short of expectations; the progress of production expansion falls short of expectations; the expansion of new industries and overseas markets falls short of expectations; the risk of raw material price increases.