Incident: On August 26, 2024, Lanxiao Technology released its 2024 semi-annual report. The company's revenue for the first half of 2024 was 1.295 billion yuan, up 28.50% year on year; net profit to mother was 0.404 billion yuan, up 16.79% year on year; after deducting non-net profit, it was 0.393 billion yuan, up 16.41% year on year. The corresponding company's 2Q24 revenue was 0.664 billion yuan, up 30.98% year on year; net profit to mother was 0.235 billion yuan, up 10.75% year on year; net profit after deducting non-net profit was 0.227 billion yuan, up 9.23% year on year.

Comment: The company achieved both year-on-year growth in revenue and profit in 1H24. The company's overall gross sales margin for the first half of 2024 was 47.48%, down 0.43pcts from the same period last year. In the first half of 2024, the company's financial expenses rose 100.75% year on year, mainly because the company's 1H24 exchange income decreased and interest expenses increased; R&D expenses rose 22.79% year on year, mainly because the company increased direct investment in R&D; and sales expenses increased 23.09% year on year, mainly due to the increase in the company's employee remuneration and travel expenses. 1H24's net interest rate was 31.65%, down 2.94 pcts from the same period last year. We believe that 1H24's profit growth is mainly due to the company seizing market opportunities in the booming development of the industry and releasing production capacity with remarkable advantages.

The company's net cash flow from 1H24 operating activities increased year over year. Net cash flow from the company's operating activities in the first half of 2024 was $0.211 billion, up 16.08% year on year; net cash flow from investment activities was -0.189 billion yuan, down 13.44% year on year; net cash flow from financing activities was -0.029 billion yuan, down 105.97% year on year. The balance of cash and cash equivalents at the end of the period was $2.14 billion, up 25.00% year over year. Accounts receivable amounted to $0.755 billion, up 60.78% year over year, and the receivables turnover ratio declined, from 2.20 in the same period in 2023 to 1.88. Inventory turnover increased from 0.49 times in the same period in 2023 to 0.59 times.

The company's “basic warehouse” business trend is good, and the adsorption materials sector maintains a high level of profitability. In the first half of 2024, the company's revenue and net profit both increased year-on-year, reaching record highs. 1H24 has steadily used adsorption materials as the core growth engine of its business, showing good resilience and maintaining a high level of gross margin.

According to the company's 2024 semi-annual report, 1H24's absorption materials revenue was 0.974 billion yuan, accounting for 82% of total revenue, and gross margin was 51.00%, an increase of 1.50 pcts. Life science, metal resources, water treatment and ultra-purification are important downstream applications in the company's adsorption materials sector. The revenue achieved by 1H24 adsorption materials in these fields was 0.285 billion yuan, 0.121 billion yuan, and 0.323 billion yuan, respectively, up 33%, 45%, and 30% over the previous year. Among them, the high growth rate of the life science business is due to a sharp increase in sales of downstream GLP-1 polypeptide drugs; the high market penetration rate of the water treatment and purification business is due to its outstanding competitive products and technologies. We believe that the company's “basic warehouse” business can continue to stabilize the competitive advantage of the chassis and drive further growth in performance.

The high-quality production capacity layout is being further developed. In the first half of 2024, the company's production and sales volume increased dramatically. The production of adsorbent materials reached 0.0316 million tons, an increase of 27% over the previous year; sales reached 0.0308 million tons, an increase of 35% over the previous year.

The company's overall layout opens up the interoperability and complementarity of production capacity in each factory area, continuously refines and upgrades equipment and processes in a targeted manner, improves management quality, and promotes a steady increase in production. In recent years, the company has formed a complementary collaborative pattern of multi-functional industrial parks in China. Gaoling New Materials Industrial Park's 0.025 million-ton special product line, Pucheng New Materials Industrial Park's 0.015 million-ton application line, Gaoling System Engineering Park plant production, Hebi Lansai resource recycling, takes into account output and quality, covers almost all process units, and forms a scientific and reasonable production capacity layout. In July 2024, the company plans to build 0.02 million tons of high-end materials production capacity to meet the needs of the high-end application market expansion, and also build Pucheng Lanxiao High-end Material Manufacturing Industrial Park.

The adsorption materials and system equipment for the SDIC Luo Potassium Project were successfully delivered in 1Q24, further demonstrating the company's ability to perform high-quality and efficient projects; as of 1H24, the first production line of the company's Guoneng Mining Results Chaka Project has begun commissioning and testing, overcoming challenges such as high altitude, difficult construction and operation, and is expected to become the first industrial-grade “direct lithium extraction” benchmark project put into operation in Tibet.

Continue to lead the salt lake lithium extraction market. The company has solid technical reserves, leading industrialization capabilities and high-quality project implementation capabilities in the field of lithium extraction in salt lakes, and has won the title of “DLE Leader” (leading enterprise in direct lithium extraction technology) among global customers. As of 1H24, the company has completed and implemented more than 15 industrial projects for lithium extraction in salt lakes, with a total production capacity of nearly 0.1 million tons of lithium carbonate/lithium hydroxide, 6 of which have been successfully put into operation. In the first half of 2024, the company's salt lake lithium extraction system achieved revenue of 0.099 billion yuan, an increase of 8% over the previous year. Although the price of lithium resources was relatively low in the first half of the year, the company's salt lake lithium extraction technology route had significant cost advantages, and the projects already in operation maintained a high production load. Adhering to the concept of “strong cycle grasping, weak cycle grinding technology, promoting cost reduction and efficiency through technological progress, and improving market share and technical control capabilities”, the company continues to upgrade and optimize process technology and adsorbent products, exploiting the technical characteristics of adsorption technology in the form of a “material+device” function unit, and pioneered the DLE production line's assembly combination model of “removing impurities” and “refining”, and realized a flexible, self-evolving, and associated development technology in the industrialization of lithium extraction in salt lake. In addition, the company also actively lays out the lithium industry chain in multiple dimensions to continuously improve the application level of adsorption technology in fields such as lithium ore refining, lithium battery recycling, and associated mining. We believe that with the company's investment in R&D and innovation, it is expected to build higher technical barriers and core competitiveness in the salt lake lithium extraction field, and the company is expected to get more orders in the salt lake lithium extraction field.

Overseas markets are booming, and a global and international enterprise is being built. The company's internationalization strategy started early and has a broad layout. It adheres to innovation-driven concepts, follows a high-quality positioning, and has gradually broken through in key overseas markets. The penetration rate of overseas markets has also gradually increased in recent years. In the first half of 2024, the company achieved overseas revenue of 0.352 billion yuan, an increase of 56% over the previous year. The company attaches importance to in-depth cooperation with overseas strategic customers. Taking salt lake lithium extraction technology as an example, the South American R&D center established by the company in Argentina is an important “strategic fulcrum” in the international market, and is committed to continuously providing efficient, timely and localized technical services to customers in the “lithium triangle” region. In terms of promotion, the company also actively has in-depth exchanges with customers in South America, North America and other places through high-frequency technical exchanges, customized technical solutions, small tests and pilot tests to promote project implementation.

Investment advice: The company is expected to achieve operating income of 3.149/3.895/4.726 billion yuan in 2024-2026, and realized net profit of 0.951/1.181/1.463 billion yuan respectively, corresponding EPS of 1.88/2.34/2.90 yuan, respectively. The PE multiples corresponding to the current stock price are 23.7X, 19.1X, and 15.4X, respectively.

Based on the following aspects, 1) the company's basic warehouse business is growing well, and marginal supply and demand in the industry is expected to further increase the company's product market share; 2) the company's salt lake lithium production capacity continues to expand, with significant technical barriers and cost advantages. As the industry cycle recovers and the global layout gradually improves, we are expected to contribute more performance in the future; 3) the high-quality production capacity layout drives the company's productivity further development and stabilizes competitive advantage.

We are optimistic about the growth of the company's main business and the increase in performance brought about by the release of production capacity, and give it a “buy” rating.

Risk warning: risk of fluctuations in raw materials and energy prices; downstream demand falling short of expectations; progress of new construction projects falling short of expectations; risk of macroeconomic fluctuations, etc.