Company announcement: COFCO Science and Engineering released its 2024 mid-year report on the evening of August 29, 2024. In the first half of the year, the company achieved operating income of 0.89 billion yuan (yoy -11.4%), net profit to mother of 0.082 billion yuan (yoy +0.39%), and net profit of 0.073 billion yuan (yoy -1.0%) after deducting non-return to mother. In the second quarter of a single quarter, the company achieved revenue of 0.54 billion yuan (yoy -8.0%, qoq +49.7%), net profit to mother 0.048 billion yuan (yoy -0.6%, qoq +40.1%), and net profit of 0.043 billion yuan (yoy -3.4%, qoq +38.4%) in the single quarter. Results fell short of expectations due to a slowing pace of order conversion.

The gross margin of the design consulting business improved a lot, driving a steady increase in the company's performance. The company's comprehensive gross profit margin for the first half of the year was 26.8% (yoy+3.8pct), net profit margin 9.2% (yoy+1.0pct), and the company's comprehensive gross profit margin for the second quarter was 26.93% (yoy+4.3pct, qoq+0.7pct). In the first half of the year, the company's design consulting revenue was 0.22 billion yuan (yoy -2.8%), gross profit margin of 51.4% (yoy+6.7pct); mechatronic engineering systems achieved revenue of 0.47 billion yuan (yoy +5.9%), gross profit margin 16.6% (yoy+2.94pct); equipment manufacturing achieved revenue of 0.18 billion yuan (yoy -34.6%), gross profit margin 22.2% (yoy+2.0pct). By business, although revenue from the equipment manufacturing business is under some pressure, the revenue structure has improved, and gross margin has been rising steadily, driving the company's performance to rise steadily.

R&D expenditure continued, with a slight increase in the cost rate. In the first half of the year, the company's four sales/management/ R&D/finance cost ratios were 1.3%/8.4%/6.2%/-0.7%, respectively, compared with +0.3%/+1.0%/+0.2%, respectively. The overall cost rate increased by 2.8 pct, mainly due to a decrease in the scale of operating income and a sharp increase in R&D expenses, mainly due to the rigidity of the company's main R&D project expenditure. The company has the advantage of leading R&D capabilities. It has 4 provincial and ministerial technical research centers, including the National Engineering Laboratory for Grain Processing Machinery and Equipment, the National Food Processing Equipment Engineering Technology Research Center, 2 national R&D and innovation platforms; the National Food Administration's Grain Processing Engineering Technology Research Center, and the Grain and Oil Processing Equipment Engineering Technology Research Center. As of the first half of 2024, the company has obtained 614 patents and formulated nearly 100 industry specifications and standards.

The long-term logic of granary construction remains unchanged; it is expected that the “14th Five-Year Plan” and “15th Five-Year Plan” will maintain a high growth rate. In June 2023, the Ministry of Agriculture and Rural Affairs, together with the National Development and Reform Commission, the Ministry of Finance, the Ministry of Natural Resources and other departments jointly issued the “National Modern Facility Agriculture Construction Plan (2023-2030)”, which proposes to focus on building 0.035 million storage and preservation facilities by 2025 to make up for shortcomings in drying facilities and equipment in grain production areas, and the drying capacity of grain production areas will reach 65%; by 2030, a total of 0.06 million storage and preservation facilities will be built, and continue to complete the renovation and upgrading of a number of old food drying centers (points), etc. . We expect that granary construction will maintain a high growth rate in the next five to six years. The company is expected to fully achieve its own growth in the process of solving the problems that China's grain storage still faces, such as insufficient total storage capacity, unreasonable regional layout of effective storage, and still relatively poor grain storage facilities and technical standards in some regions.

Investment analysis: Considering the decline in revenue growth due to the slowdown in the company's order pace in the first half of the year, we lowered the company's profit forecast and expected to achieve net profit of 0.27/0.32/0.37 billion yuan in 2024-2026 (previous forecast 0.39/0.49 billion yuan for 2024-2025, plus 2026 forecast), +23.2%/17.3%/16.4%, respectively. The price-earnings ratio per share corresponding to the closing price on September 6 was 15, 12, and 11 times, respectively. The company has a leading edge in granaries, cold chain, equipment manufacturing, etc. We are optimistic that the company will fully grow during the construction of granary facilities in China, but short-term company performance is still under pressure to influence the pace of the project, so we downgraded the company to “gain weight”.

Risk warning: Granary construction and cold chain logistics construction are below expectations, and the pace of on-hand order conversion falls short of expectations.