Key points of investment

Performance was under pressure; net profit to mother fell 45% year on year in the first half of 2024, down 38% year on year in 24Q2. In the first half of 2024, the company achieved operating income of 0.58 billion yuan, up 8.75% year on year; net profit to mother was 60.09 million yuan, down 44.58% year on year; net profit without return to mother was 37.78 million yuan, down 55.6% year on year. The 2024Q2 company achieved revenue of 0.315 billion yuan in a single quarter, up 26.73% year on year; net profit to mother was 30.24 million yuan, down 38.45% year on year. The decline in profit in the first half of 2024 was mainly due to 1) the company's CNC tool industrial park project was put into operation, and the initial gross margin of the new production project was low; 2) the company accelerated product upgrades and the launch of new products, increasing R&D expenses; at the same time, financial expenses increased. This combined led to a year-on-year increase in the cost rate for the period. By product, 1) CNC tools: revenue of 0.321 billion yuan, up 3.66% year on year; 2) hard alloy products: revenue of 0.254 billion yuan, up 14.35% year on year.

Profitability is under pressure. In the first half of 2024, gross margin fell 6.51 pct year on year, and 24Q2 decreased 6.11 pct. Profitability: gross sales margin and net margin were about 26.14% and 10.37% respectively in the first half of 2024, down 6.51 and 9.98 pcts year on year. Among them, the gross profit margin of CNC tool products is 35.77%; the gross profit margin of hard alloy products is 14.47%. 2024Q2's gross profit margin in a single quarter was 27.03%, down 6.11 pct year on year, up 1.94 pct month on month; net sales margin was 9.59%, down 10.15 pct year on year, down 1.72 pct month on month. Profitability pressure in the first half of 2024 was mainly due to the fact that the company's CNC Tool Industrial Park project was put into operation. It was in the phase of rising production capacity, and the initial gross margin of the new production project was low.

Cost side: The cost rate for the first half of 2024 was 15.12%, an increase of 3.04pct over the previous year, mainly due to an increase in financial and R&D expenses. Among them, sales, management, R&D, and financial expense ratios were about 3.41%, 3.54%, 6.86%, and 1.32%, respectively, with year-on-year changes of -0.12, -0.95, +2.26, and +1.85pct, respectively.

The domestic manufacturing boom cycle is rising at the bottom, and overseas expansion+turnkey business promotes growth 1) Overseas expansion: The company seizes export opportunities and increases overseas development efforts. The company will establish a European subsidiary in Germany, further expand overseas sales channels and overseas influence through permanent overseas offices, and further improve its overseas layout. Overseas market revenue for the first half of 2024 was 0.115 billion yuan, up 94.67% year over year. Among them, CNC tool export revenue was 97.072 million yuan, an increase of 117.94% over the previous year, and CNC tool exports accounted for 30.22% of CNC tool revenue. The average export unit price of CNC tools is 11.83 yuan/piece, and the product structure is becoming high-end.

2) End customer development: ① Oukeyi brand stores cover small and medium-sized customers; ② Selci brand stores cover medium-sized customers to serve customers with overall tool configuration requirements; ③ launch a turnkey solution for large customers with complete package and on-site tool management needs.

Profit forecasting and valuation

Net profit for 2024-2026 is expected to be 0.154, 0.219, and 0.294 billion, a year-on-year decline of 7%, an increase of 42%, an increase of 34%, and CAGR = 38%. The corresponding PE is 19, 13, and 10 times, maintaining the “buy” rating.

Risk warning: 1) The recovery of the manufacturing industry fell short of expectations; 2) the domestic competition pattern deteriorated; 3) Overseas market development progress fell short of expectations.