1H24 results fall short of our expectations

The company announced the interim report: 1H24 revenue was 0.18 billion yuan, +13.3% year over year; net profit to mother was -31.73 million yuan, -2.24 million yuan for the same period in 2023; deducted non-net profit was -33.74 million yuan, compared to -5.23 million yuan for the same period in 2023. Corresponding to 2Q24, revenue was 73.6 million yuan, +42.4%/-27.7% YoY; net profit to mother was -22.03 million yuan, -14.25 million yuan for the same period in 2023; deducted non-net profit was -22.96 million yuan, compared to -16.54 million yuan for the same period in 2023. 1H24's performance fell short of our expectations. The main reason was that the company was in the testing equipment investment stage, and profitability was under pressure due to cost and cost expectations.

Development trends

The cost ratio increased during the period, and gross margin was under pressure in the short term. 1H24's sales management and research expenses rates were 5.3%/20.2%/13.7%, respectively, totaling 39.3%, compared with +3.9 pct. Among them, the increase in sales expense ratio was due to an increase in sales staff. On the gross margin side, 1H24's gross margin was -16.0pct to 23.7% year-on-year, 2Q24 gross margin was 17.0%, and -16.9pct/-11.7pct compared to the same period last month. The main reason was that newly invested test equipment had an adaptive debugging process, which led to a large phased share of fixed costs. We believe that gross margin may rebound in the future as the scale effect of testing services is realized.

The fund-raising project is progressing smoothly, and production capacity construction has expanded testing service capabilities. The company's intelligent driving test center and integrated inertial guidance R&D and production projects are expected to be ready for use in 2025. Among them, the installation and commissioning of the new energy vehicle powertrain test centers in Tianjin and Munich, Germany is being carried out in a steady and orderly manner, laying the foundation for further broadening market coverage and deepening market penetration. Furthermore, the company established cooperation with SGS, a world-renowned testing and certification agency, and powertrain smart devices successfully entered the Hungarian and Polish markets. We believe that the company is in a period of pre-cost pressure. With the implementation of reserve projects such as test centers, the company's future revenue is expected to grow further, waiting for subsequent performance optimization.

With intelligent driving layout, order volume may support performance growth. As L3 vehicle regulations advance, we believe that intelligent driving tests may become mandatory tests, which is expected to increase the growth of the company's business. In terms of inertial guidance products, the company has successfully designated various smart car models from many domestic OEMs. According to the company's WeChat account article, the company has provided high-precision inertial sensors for the Zhiji L6 and has achieved batch delivery. We believe that with the improvement of intelligent driving L2+, the inertial guidance market penetration rate will continue to increase, and the company may benefit from it; with the rise of the humanoid robot industry, the company's IMU technology is expected to achieve more applications in this emerging field.

Profit forecasting and valuation

Due to the company's pre-cost pressure period and short-term pressure on profitability, we lowered our 2024/2025 profit forecast by 76%/60% to 0.022/0.08 billion yuan. Considering the accelerated layout of the company's intelligent driving business, it maintained an outperforming industry rating. The current share price corresponds to 19.0 times 2025 P/E. Due to the downturn in profit forecasts and the high growth potential of the company's smart driving business, we lowered our target price by 34% to 23.3 yuan, and switched to 2025, corresponding 24.7 times the 2025 P/E, with 30% upside compared to the current one.

risks

Profit recovery fell short of expectations, and order release fell short of expectations.