2Q24 revenue is in line with our expectations

The company announced 2Q24 results: revenue of 0.24 billion yuan (year-on-year increase of 16.2%) and net profit to mother of 0.055 billion yuan (year-on-year increase of 43.1%). The revenue for the single quarter was in line with our expectations, and the elasticity of net profit growth exceeded our expectations. We believe that the increase in the share of products with high gross margin mainly exceeded our expectations.

2Q24 General-purpose blade price increases & product structure changes, and profitability has increased markedly. 1) In order to cope with the impact of rising procurement costs of raw materials, the company raised the price of the CNC blade channel in May of this year. Among them, the distribution network price increase ranged from 3% to 5%. 2) 2Q24 downstream effectively absorbed the decline in price transmission & hardening tool revenue, and the company's gross margin increased 1.9ppt to 46.0% year-on-year in a single quarter. With better cost control capabilities, 2Q24's net profit margin increased 4.3ppt to 22.8% year-on-year.

2Q24 consumer electronics hardening tools started a little late. The company started hardening tools for 3C processing in June, which led to a revenue scale of 10 million yuan for 2Q24 hardening tools. In addition to the 3C field, 2Q24 has made progress in major construction machinery and aerospace customers. We believe that 2024 will be a year to establish a solid customer base, and the gross margin can be expected to be repaired in 2025-2026.

Set up Huarui New Materials to expand bar production capacity. In mid-June, Huarui Precision established a new 100% subsidiary - Huarui New Materials. According to the “Wholly-owned subsidiary invests in the construction of a digital production line for high-performance bar profiles”, the company plans to invest 0.36 billion yuan to build a bar project in the Zhuzhou Hetang High-tech Industrial Development Zone, increasing the annual production capacity of 1,000 tons of high-performance bars. We believe that the project was initially used to improve overall competitiveness and gross profit margin, and it is expected that bars will be sold separately later.

Development trends

The export performance of the 2024H1 tool industry is good. According to the Tool Branch of the China Machine Tool Industry Association, the import value of 2024H1 tools was 4.34 billion yuan (basically the same as the previous year), and the export value was 12.39 billion yuan (up 9.8% year on year). Taking Huarui Precision as an example, the 2024H1 export growth rate also achieved medium to high double-digit growth. We are optimistic about domestic demand recovery in the second half of the year and medium- to long-term export growth potential.

Profit forecasting and valuation

Considering the slow increase in the profit of hardening tools, we lowered our 2024/2025 net profit of 4.2%/7.7% to 0.19/0.24 billion yuan. Considering the decline in the overall valuation of the general machinery and equipment sector in the first half of the year, we lowered our target price by 23% to 56 yuan. The company's current price is 14x for 2024 PE, and the target price is 18x for 2024 PE, corresponding to 27% increase space, maintaining the “outperforming industry” rating.

risks

The risk of gross margin fluctuation in a single quarter, and the risk of a slow increase in gross margin for hardened tools.