Incident: On August 24, 2024, Lianhua Technology released its 2024 mid-year report. The company's 1H24 revenue was 2.978 billion yuan, down 18.75% year on year; net profit to mother was 0.014 billion yuan, down 42.43% year on year; net profit after deducting non-net profit was 12.7412 million yuan, down 90.20% year on year. The corresponding company's 2Q24 revenue was 1.512 billion yuan, up 3.19% month-on-month; net profit to mother was 0.011 billion yuan, up 325.92% month-on-month.

Comment: The plant protection industry's “inventory removal” has put pressure on 1H24's overall performance, and 2Q24's performance is beginning to show signs of recovery. 1H24's plant protection/pharmaceutical/functional chemicals/equipment and engineering services segment revenue was 18.73/0.713/0.127/0.251 billion yuan, YoY was -24.36%/-12.17%/+47.67%/-11.54%, and gross margin was 15.51%/42.83%/26.02%/25.79%, respectively, with year-on-year changes of -1.42/6.45/8.62/-0.07pcts, respectively. The main reason for the decline in the company's revenue and profit is due to the “removal of inventory” in the plant protection industry, and the reduction in some orders. The company expects the “de-inventory” market trend in the plant protection industry to slow down in the second half of 2024, and the company will gradually get rid of the impact of the “inventory removal” market in the plant protection industry, which is expected to be reflected in the company's 2025 financial statements.

1H24's sales expenses decreased 17.93% year on year, and the sales expense ratio was 0.45%, the same year on year; management expenses decreased by 5.95% year on year, and the management expense ratio was 11.18%, up 1.52 pcts year on year; financial expenses increased by 211.95% year on year, and the financial expenses ratio was 1.85%, up 3.19 pcts year on year; R&D expenses decreased 37.15% year on year, and R&D expenses were 4.68% year on year, down 1.37 pcts year on year.

Affected by the plant protection industry's “inventory removal”, etc., 1H24's net profit declined. The net profit margin was 0.48%, down 0.19pcts year on year. In terms of gross margin, 1Q24's gross sales margin was 25.20%, and 2Q24's gross sales margin was 23.16%, down 2.04 pcts month-on-month.

The net cash flows of the 1H24 company varied greatly. Net cash flow from operating activities was $0.674 billion, up 3.43% year on year; net cash flow from investing activities was -0.373 billion yuan, up 46.49% year on year; net cash flow from financing activities was 0.059 billion yuan, down 84.42% year on year. The balance of cash and cash equivalents at the end of the period was $0.953 billion, up 15.66% year over year. Accounts receivable fell 2.68% year over year, and the accounts receivable turnover decreased from 2.71 in the same period in 2023 to 2.57.

Inventories fell 21.39% year over year, and inventory turnover declined, from 0.98 in the same period in 2023 to 0.93.

The company's three major sectors of plant protection, pharmaceuticals, and functional chemicals are developing steadily, and attention is being paid to the long-term growth of each sector.

In the plant protection sector, according to the company's 2024 mid-year report, the company relied on many years of mutual trust with customers and its own innovative strength to actively promote cooperation with major global companies on new products in the front-end pipeline, and identified a number of products that have the conditions to be marketed and commercialized in 3-5 years; in addition, the company laid out the biopesticide field, set up a biotechnology and biopesticide team, and established a biofermentation research and development platform.

In the pharmaceutical sector, according to the company's 2024 mid-year report, 1H24 has completed several verification projects and has deepened R&D cooperation with two foreign pharmaceutical giants.

In the functional chemicals sector, according to the company's 2024 mid-year report, there are currently 4 new energy products to be commercialized in the company pipeline, and product verification has been completed for downstream customers. The pilot phase is 2 and the small test phase is 15. The company will continue to do a good job of developing independent products and climbing the production capacity of existing products. We are optimistic that the company will continue to invest in the three major sectors. It is expected that the product range will be further enriched, and the overall revenue of the sector is expected to gradually increase.

The company's UK base reduced losses, and the Malaysian base gradually advanced. According to the company's 2023 and 2024 semi-annual reports, the revenue of LIANHETECH HOLDCO LIMITED, a British subsidiary of 1H24 Lianhua, was 0.494 billion yuan, up 29.66% year on year, and net profit was -0.106 billion yuan, a year-on-year decrease of 35.76%. According to the company's investor exchange minutes on June 5, 2024, the company carried out production line transformation and other work to transfer the company's original products suitable for the British subsidiary's production model to the British subsidiary for production. Furthermore, the company is actively communicating with customers, hoping to introduce new customers and products to promote the development of the British subsidiary. At the Malaysian base, the company has signed an intention to purchase industrial land and is undertaking follow-up work. In the future, the construction schedule of the Malaysian base will be adjusted according to specific orders. We are optimistic about the company's global layout. The British base is expected to gradually turn losses into profits, and the Malaysian base is expected to gradually be put into use in the future.

Investment advice: We expect Lianhua Technology's revenue for 2024-2026 to be 6.317/7.858/9.472 billion yuan, up -1.9%/24.4%/20.5% year-on-year, and net profit to mother of 0.086/0.351/0.614 billion yuan, respectively, up 118.5%/308.7%/74.9% year-on-year, corresponding EPS of 0.09/0.38/0.66 yuan respectively.

Combined with the company's closing price on September 2, the corresponding PE was 52/13/7 times, respectively. Based on the following two aspects: 1) We are optimistic that the company will continue to invest in the three major sectors. It is expected that the product range will be further enriched, and the overall revenue of the sector will gradually grow; 2) We are optimistic about the company's global layout. The British base is expected to gradually turn losses into profits, and the Malaysian base is expected to gradually be put into use in the future to maintain a “buy” rating.

Risk warning: raw material price fluctuation risk, environmental risk, macroeconomic fluctuation risk, R&D risk, management risk, exchange rate fluctuation risk