Core views

Zongshen Power announced its 2024 mid-year report. The second-quarter results showed a high month-on-month increase. 24Q2 total revenue was 2.482 billion, +28.9% year-on-year and +6.5% month-on-month. Gross margin reached 16.4%, +1.6pct month-on-month; net profit to mother was 0.162 billion, +9.5% year-on-year and +35% month-on-month. The fee rate for the period remained stable. The fee rate for the second quarter was 7.9%, +0.2pct compared to the previous quarter. Revenue from all products increased in the first half of the year, and the company's engine products achieved revenue of 2.03 billion, +26.3% over the same period last year. Tongji products achieved revenue of 2.11 billion, +3.1% year-on-year. Product components achieved revenue of 0.24 billion, +4.5% year-on-year. The profit of the aviation development business achieved a breakthrough. Zongshen Hangfa's revenue was nearly 0.1 billion yuan, more than doubling the month-on-month increase of 23H2, contributing 17.11 million yuan to net profit, which was positive month-on-month.

The acquisition of shares in Longxin General by the participating company Zongshen Xinzhizao is progressing in an orderly manner, and it is expected that business collaboration will be achieved in the future.

occurrences

Zongshen Power announced its 2024 mid-year report. The second-quarter results showed a high month-on-month increase. 24Q2 total revenue was 2.482 billion, +28.9% year-on-year and +6.5% month-on-month. Engine revenue increased sharply year-on-year in the first half of the year, and the aviation development business began to contribute to profits.

Brief review

Q2 performance increased month-on-month, with net profit of 0.162 billion yuan to mother:

The company's 24Q2 total revenue was 2.482 billion, +28.9% YoY, +6.5% month-on-month; 24Q gross margin reached 16.4%, +1.6pct month-on-month; net profit to mother was 0.162 billion, +9.5% YoY, +35% month-on-month

The cost rate remained stable during the Q2 period:

The cost for the Q2 period was 0.197 billion, with a period cost ratio of 7.9%, +0.2pct. Among them, sales/management/ R&D/finance expenses were 2.5/2.5/3.1/ -0.2%, respectively, and +0.4/+0.2/-0.7 pct, respectively.

Separated by business segment, engine revenue increased significantly year over year:

1) 24H1, the company's engine products achieved revenue of 2.03 billion, +26.3% year over year, gross profit margin 11.1%, and -2.03 pct year on year;

2) 24H1, Tongji products achieved revenue of 2.11 billion, +3.1% year over year, gross profit margin of 14.8%, and -0.26pct year on year;

3) 24H1, product components achieved revenue of 0.24 billion, +4.5% year over year, gross profit margin 18.9%, and -4.6 pct year on year;

The aviation development business began to contribute to profits:

In 24H1, Zong Shenhang generated revenue of nearly 0.1 billion yuan, which more than doubled month-on-month growth of 23H2, contributed 17.11 million yuan to net profit, and changed positive month-on-month.

Zongshen Aviation Development Company is actively deepening the layout, developing application scenarios such as emergency rescue, agriculture, forestry and plant protection, and at the same time accelerating the airworthiness certification process and research and development of hybrid aviation development products, laying a solid foundation for the widespread application of products in the field of low-altitude economy.

The participating company became a shareholder of Loncin General Holdings and is expected to achieve business collaboration:

Longxin GM's main business is motorcycle manufacturing and general machinery manufacturing. It has rich industrial resources and is expected to form a business synergy with the company. Furthermore, since the shareholders of Zongshen Xinzhizao and their related parties compete with Longxin GM's main business, there is a possibility of business integration between the two parties in the future.

Investment advice: We expect the company's net profit to be 0.646/0.75/0.884 billion yuan in 2024-2026, corresponding to PE 20.78/17.91/15.19x, maintaining a “buy” rating.

Risk analysis

1. Risk of fluctuating raw material costs. The company's core products rely on key raw materials such as steel, aluminum, and plastics. Commodity prices may fluctuate due to the instability of the international political and economic environment. Such fluctuations may adversely affect the company's cost structure, operating performance, and gross margin.

2. Risk of exchange rate changes. In view of the high share of the company's export business, changes in the exchange rate of RMB and the currency of the export destination country may have a significant impact on the company's financial situation. Global macroeconomic events, such as regional political conflicts and interest rate adjustments by the Federal Reserve, may cause exchange rate fluctuations, which in turn affects the company's export competitiveness and exchange losses, and increases the company's financial costs.

3. Macroeconomic changes and market risks. Global macroeconomic fluctuations, including regional political conflicts and monetary policy adjustments, may lead to unstable demand in overseas markets and increase companies' production and inventory risks.