Incident: The company released its 2024 mid-year report on August 14, 2024. In 1H24, it achieved revenue of 0.16 billion yuan, YoY -47.8%; net profit attributable to mother 1.7 million yuan, YoY -95.8%; net profit after deducting non-return to mother - 1.27 million yuan, or 0.03 billion yuan for the same period last year. The decline in the company's performance was mainly due to the impact of the industry environment, orders for multiple models were delayed, and new orders fell short of expectations during the reporting period, leading to a decrease in delivery. Our comprehensive review is as follows:

Q2 The level of gross margin increased. Looking at a single quarter, the company achieved revenue of 0.11 billion yuan in 2Q24, a year-on-year decrease of 53.4%, and a month-on-month increase of 125.5%; net profit to mother was 0.01 billion yuan, a year-on-year decrease of 69.1%, which was a significant month-on-month improvement (1Q24 was -0.01 billion yuan). In terms of profit margin, 2Q24 gross margin increased 8.69ppt to 51.5% year over year; net margin decreased by 5.90ppt to 11.6% year over year. In the first half of 2024, the consolidated gross margin increased 5.23ppt to 50.0% year over year, and the net margin decreased by 12.09ppt to 1.1% year over year. Previously, the decline in the company's gross margin was mainly affected by various factors such as changes in sales structure, product price reductions, and increased localization rates, but we observed that the company's gross margin for five consecutive quarters from 23Q2 to 24Q2 was 43%, 46%, 41%, 47%, and 52%, respectively, and the overall gross margin level has stabilized within a certain range.

Continued emphasis was placed on technology research and development, and the number of new 24H1 research projects increased 18% year-on-year to 120. In terms of expenses, the 24H1 company's fee rate for the period was 55.1%, an increase of 23.59ppt over the previous year. Among them: 1) sales expense ratio was 8.5%, up 3.04ppt year on year; 2) management expense ratio was 12.3%, up 5.87ppt year on year; 3) financial expense ratio was 1.1%, up 0.80ppt year on year; 4) R&D expense ratio was 33.2%, up 13.88ppt year on year; R&D expenses were 0.05 billion yuan, a decrease of 10.3% year on year. There are 2 main reasons: First, due to material costs and material control, R&D pickers decreased year-on-year; second, the number of R&D personnel decreased compared to the same period last year, and employee remuneration decreased. In terms of R&D projects, the company relied on advantages such as new technology, localization and low cost, and obtained 120 new projects in the first half of 2024, an increase of 17.65% over the same period last year. At the same time, continuous progress has been made in various technical directions such as next-generation avionics buses, ultra-high speed inter-board interconnection buses, image sensing and intelligent processing, and inertial signal acquisition and processing.

Inventories are up 19% from the beginning of the year, or an indication that demand is still growing. By the end of 2Q24, the company: 1) accounts receivable and notes were $0.76 billion, a decrease of 7.4% from the beginning of the year, mainly due acceptance of notes receivable; 2) inventory was $0.27 billion, up 18.7% from the beginning of the year. The company's Q2 revenue declined year over year, but inventory increased compared to the beginning of the year, or reflected strong downstream demand; 3) monetary capital was 0.02 billion yuan, a decrease of 80.3% from the beginning of the year, mainly to pay for production plants, etc., and to pay back part of the loan; 4) Net cash flow from operating activities was -0.002 billion yuan, or -0.055 billion yuan in the same period last year, mainly an increase in maturing and accepting notes receivable year-on-year.

Investment advice: The company is a leading private enterprise in the special embedded computer industry. It has been deeply involved in airborne and ballistic fields for many years, and has also strengthened its layout in low-altitude economy and commercial satellite-related fields. It has successfully participated in drone flight control systems, avionics grid systems, commercial satellite data links, and commercial rocket support. According to changes in the pace of downstream demand, we adjusted the company's net profit from 2024 to 2026 to 0.112 billion yuan, 0.152 billion yuan, and 0.204 billion yuan. The current stock price corresponds to the 2024-2026 PE of 23x/17x/12x, maintaining the “recommended” rating.

Risk warning: downstream demand falls short of expectations; contract signing falls short of expectations, etc.