Incident: In 2024, H1 achieved revenue of 2.02 billion yuan, -4.33% YoY; realized net profit of 0.348 billion yuan, or -17.24% YoY; realized net profit without return to mother 0.312 billion yuan, or -16.37% YoY.

Q2 achieved revenue of 1.227 billion yuan, +3.13% year over month, +54.6% month on month; realized net profit of 0.238 billion yuan, +11.83% year on year, +115.39% month on month; realized net profit without return to mother 0.219 billion yuan, +22.62% year on year and +136.12% month on month. The Q2 single quarter performance was very impressive, and we think it was due to three factors:

(1) Orders for the superconducting business were successfully delivered. During the period, the company completed the delivery of the nuclear fusion CRAFT project, batch production delivery of the BEST fusion project, and also completed the design, production, and delivery tasks of various extended businesses in the superconducting magnet and superconducting motor categories. In the first half of the year, the superconducting business achieved revenue of 0.482 billion yuan, an increase of 19.95% over the previous year.

(2) The month-on-month increase in delivery of the titanium alloy business led to an increase in capacity utilization. Coupled with the year-on-year decline in the price of raw materials, this led to a significant improvement in profitability. In the first half of the year, the company's titanium alloy business achieved revenue of 1.284 billion yuan, a year-on-year decrease of 4.07%. However, 2024H1 increased 10.03% month-on-month compared to 2023H2, showing a certain upward trend. The company's overall capacity utilization rate increased month-on-month, and the scale effect was evident. At the same time, the price of titanium sponge, the main raw material in the upstream, stabilized at 0.048-0.056 million/ton. Compared with the price of 0.055-0.08 million yuan/ton in the same period last year, the price drop brought about a slight profit elasticity. Combining the two factors, the company achieved a gross profit margin of 36.95% in the titanium alloy business in the first half of the year, an increase of 2.54 pcts over the full year of last year.

(3) Prices of upstream raw materials in the superalloy business have dropped significantly compared to last year. At the same time, process maturity has gradually increased, leading to significant improvements in profitability. The company mainly produces nickel-based deformed superalloys. Nickel prices showed a downward trend throughout 2023. LME nickel prices fell from 0.03 million/ton at the beginning of 2023 to 0.0165 million/ton at the end of the year.

However, although nickel prices rose for a period of time from 0.016 million US dollars/ton to 0.021 million US dollars/ton in 2024, the price returned to 0.016 million US dollars/ton in the next 5-7 months. Overall, the current upstream raw material price center has dropped by about 20-30% compared to 2023, which has led to a certain increase in gross margin. Because the second phase of the superalloy production line was put into trial production in the first half of the year, and research and development of return material technology continued to be carried out, there was a certain increase in production and construction costs, but overall, the impact of changes in raw material prices was greater than this portion of investment. The first half of the year achieved a gross profit margin of 21.35%, compared to +5.49 pcts for the whole of last year.

Looking ahead to the company's subsequent growth, the price of titanium sponge on the raw material side may exceed demand or will continue. At the same time, nickel prices are still in a downward cycle, and the prices of the two major commodities are still in a downward cycle. The products made by the company have a core card position advantage, so the profitability elasticity is sustainable. However, the company's complete research and development system continues to store energy for growth. In the first half of the year, the company made excellent progress in superconducting motors, superconducting magnets, oversized corrosion-resistant and high-toughness titanium alloy forging blanks, and high-temperature alloy return materials. With the gradual implementation of production capacity in many advanced production lines this year, the company is expected to maintain its role as a leader in growing enterprises in the field of new materials.

In terms of cost ratio, the company's expense ratio for the first half of the year was 13.86%, +3.17pct year on year. Sales/management/R&D/finance expenses rates were 0.65%, 3.43%, 8.88%, and 0.9%, respectively, with year-on-year changes of 0.09, 0.28, 2.71, and 0.09pct, respectively. As mentioned above, the company is in the rapid iteration stage of product development in the three major business areas, making the company's overall R&D investment large. We believe that the company is entering a multi-growth curve energy storage stage. There is plenty of room for growth in several major fields in the future, laying a firm foundation for high growth in the next few years.

In terms of balance sheet, as of mid-2023, the company's inventory reached 3.45 billion yuan, up 21.33% from mid-2023; fixed assets reached 1.441 billion yuan, up 4.95% from mid-2023 and 2.49% from the end of 2023; and construction in progress reached 0.627 billion yuan, up 326.81% from mid-2023, and 16.87% higher than at the end of 2023. We believe that the preparation ratio of upstream raw materials has been adjusted to a certain extent since last year, but under these conditions, inventory and production capacity have increased to a certain extent, both year-on-year and month-on-month. Based on the current pace of recovery in the military industry, the company has gradually established supply-side flexibility, which is expected to fully unleash growth momentum along with the recovery in prosperity.

Profit forecast: Due to a slight delay in the release of military orders in the first half of the year, causing brief fluctuations in the pace of the company's performance release this year, after personnel adjustments and equipment order adjustments are completed, the company is still fully resilient to growth. The company's net profit for 2024-2026 is 0.9/1.1/1.31 billion yuan respectively (1.109/1.422 billion yuan before 2024-2025), and the corresponding PE is 27/22/18X, respectively, maintaining a “buy” rating.

Risk warning: risk of fluctuations in military orders; risk of falling raw material prices; risk of new product development and batch production falling short of expectations