Performance summary: 2024H1 achieved operating income of 1.43 billion yuan (-9.6%), achieved net profit of 0.16 billion yuan (-35.2%), corresponding EPS of 0.36 yuan, net profit of 0.16 billion yuan (-36.2%) after deducting non-return to mother net profit of 0.16 billion yuan (-36.2%). In 2024Q2, the company achieved operating income of 0.78 billion yuan (-17.2% YoY, +19.0%), realized net profit of 0.09 billion yuan (YoY -29.3%, +21.2% month-on-month), and net profit of 0.086 billion yuan (YoY -28.6%, YoY +25.3%);

Company introduction: Torch Electronics' main business includes electronic components and new ceramic materials. The electronic components sector mainly includes passive components and active components. It is one of the domestic specialty MLCC suppliers. The downstream includes civil communications, automobiles, consumer electronics and other industrial fields, and military fields such as missiles, electronic countermeasures, radar and satellite communications; the new materials sector is implemented by Liya. The main products include special ceramic materials and upstream precursors and substrates. The application areas include aerospace, nuclear industry and other heat-end structural components;

The electronics sector is gradually stabilizing, and ceramic fiber is ready to go: In the reporting period, despite the risk of fluctuating demand and declining operating efficiency, the military electronic components sector still showed a trend of gradual stabilization. As deliveries accelerate at the end of the 14th Five-Year Plan period, the industry is expected to pick up, while civilian electronic components are still in a slump period where volume and prices have declined, and expectations have not improved; in terms of ceramic materials, the industry is showing an oligopolistic competitive trend. As some projects are nearing completion in 2023, revenue is declining. According to Huaqin Science and Technology's interim report, military aero engines have formed a situation of “three generations of stable delivery, four generations of development, and five generations of accelerated pre-research”, and ceramic-based composites have become a key thermal structural material for aero engine upgrades. Ceramic fiber customers such as Huaqin Technology are carrying out early construction work to achieve trial production of some production lines in the second half of 2024. At that time, it will drive a high increase in demand for ceramic fiber and its pioneers;

Demand recovery has been repeated: price review pressure, demand cycle fluctuations combined with inventory pressure have caused the company's volume and price growth to drop sharply. The revenue growth rate has declined seven quarters since 21Q4, revenue has resumed year-on-year growth since 23Q3, and the 24Q2 growth rate has turned negative, showing that although the electronic components sector has improved, demand recovery is still repeated. By business, the company's self-produced components business achieved revenue of 0.54 billion yuan (-17.4%), mainly due to a year-on-year decrease in the number of specifications shipped; the new materials sector achieved revenue of 0.066 billion yuan (-15.1%). We estimate that this was mainly due to 9% of the company's business gap period after the completion of the project; international trade business revenue of 0.082 billion yuan (-3.4%), mainly due to increased competition; profitability rebounded: 2024H1's overall gross profit margin of 32.2%, gross profit margin for the second quarter 33.3% (+0.7pcts compared to the previous month). We estimate that this is mainly due to the increase in the share of revenue from the electronics business of the joint stock company's electronics business. By business, the gross margin of self-produced passive components and ceramic materials decreased by 6.7 pcts1.05 pcts in the first half of 2024 compared to 2023, while the gross margin of trading business and self-produced active components increased by 3.04 pcts and 1.44 pcts. It can be seen that although the gross margin of the self-produced passive components business, which accounts for a high proportion of revenue (32.6%), is still declining, due to the increase in its revenue share (28.6% → 32.6%), the overall gross margin compared to 2023;

Financial data: Management expenses increased by 17.9%, mainly due to increased depreciation and amortization of assets. During the reporting period, the sharp decrease in bills receivable was due to bill maturity collection and discounting; during the reporting period, projects under construction were drastically reduced by 73.0%, mainly due to the consolidation of the Zihuayuan Phase I factory area; other non-current assets increased by 208% during the reporting period, mainly due to the company's enhanced cash management and equipment purchase; ongoing construction progressed in an orderly manner: Currently, the company's projects under construction include the Zihuayuan Plant Construction, Dielectric Layer Ceramic Capacitor Project, Liya Special Ceramic Materials Pioneer Project Phase II, and Zihua Fiber Research Institute Project, currently based on the Zihuayuan Fiber Research Institute project Semi-annual report situation, dielectric layer ceramic capacitors for convertible bond raising The industrialization project is expected to be put into operation until December 2024. In the reporting period, the first phase of the Zihuayuan project and the Liya Te Tao project are progressing rapidly. Preliminary construction of the Zihuayuan Phase II and Zihua Fiber Research Institute projects has begun, and production capacity construction is progressing in an orderly manner; exploring potential efficiency increases the core competitiveness of the product: electronic components sector, the company mainly focuses on new business exploration and horizontal business development -- during the reporting period, Tianji Technology continued to grow 11.mm in the film capacitor business in the context of fierce competition in the stock market; Develop key technologies for core products In 2024H1, revenue from the self-produced business increased by 16%; Chengdu Torch continued to promote business transformation and demand exploration. In particular, in response to the single customer problem, it increased the development of the civilian market, and achieved a steady increase in the number of orders and a significant month-on-month improvement in revenue and profit. In the ceramic materials sector, the company focused on customer training and efforts to reduce costs and increase efficiency -- During the reporting period, Ria New Materials deepened close communication with customer units, accelerated application expansion, and actively explored new production models to improve operational efficiency based on the purpose of further reducing the cost of new materials; while achieving the goals set, Liya Chemical completed a review of projects such as National Specialized New Giant and National High-tech Enterprise, which effectively enhanced its product competitiveness and industry popularity; Investment Suggestions: The company's electronic components business is under pressure under multiple pressures, and the industry is expected to grow as demand gradually recovers Stable. Ceramic materials are a key area of the company's layout. Currently, it is in the shift period from pre-research to mass production. With the gradual maturity and volume of the composite process, the company's second growth curve is expected to begin. We expect the company to achieve operating income of 3.51 billion yuan, 4.04 billion yuan, and 5.01 billion yuan in 2024-2026, with a year-on-year increase of 0.2%, 15.0%, and 24.0% year-on-year net profit of 0.32 billion yuan, 0.42 billion yuan, and 0.55 billion yuan, with a year-on-year increase of 0.7%, 30.7%, and 31.5%, corresponding to PE30X, 23X, and 18X for the first time coverage, giving a “buy” rating.

Risk warning: downstream demand falls short of expectations, deteriorating competitive landscape, sharp rise in raw material prices, etc.