Revenue increased 10% in the first half of the year, and exchange losses affected net interest rates. The company is a leading manufacturer for wool and cashmere spinning. Revenue for the first half of 2024 was +10.1% YoY to 2.56 billion yuan, and net profit to mother +4.5% YoY to 0.27 billion yuan. Revenue growth was mainly driven by double-digit growth in wool and cashmere sales and growth in the finishing business. The gross margin increased 0.5 percentage points to 20.8% year on year, mainly benefiting from the increase in gross margin of the wool spinning business; sales and management expenses ratio was stable, and the financial expenses ratio was +1.7 percentage points year over year mainly affected by exchange gains and losses. The exchange income for the same period last year was 0.023 billion yuan, and this year's loss was 0.009 billion yuan. The net profit margin was then -0.6 percentage points year over year to 10.4%. Working cash was stable, inventory turnover days were 13 to 164 days year on year, number of receivable turnover days remained flat, and payable turnover days were +4 days to 40 days year on year. Revenue increased 8% in the second quarter, and the profit trend was in line with the first half of the year. Revenue for the second quarter increased 8.4% year over year to 1.46 billion yuan, and net profit to mother increased 3.4% year over year to 0.17 billion yuan. Gross margin increased slightly by 0.4 percentage points. The financial expense ratio of +1.9 percentage points year over year was mainly affected by exchange gains and losses. Further, the net profit margin increased by -0.6 percentage points year-on-year to 11.7%. Capital expenditure increased 48.2% year over year to 0.19 billion yuan, and is expected to be mainly used for new production capacity construction.

The wool spinning and dyeing processing business performed well. In the first half of the year, worsted spinning, cashmere yarn, wool stripe, modified treatment and dyeing revenue increased by 18.3%/20.3%/-2.4%/76.2% to 11.5/0.66/0.28/0.02 billion yuan respectively. Among them, 1) The revenue growth of the worsted spinning business was mainly driven by sales volume, with sales volume/unit price +13%/-3% year-on-year, respectively; profits were stable, and gross margin increased 1.4 percentage points year-on-year. 2) Sales in the cashmere yarn business grew rapidly, with sales volume/unit price +39%/-14%, respectively; gross margin fell 2.1 percentage points, mainly affected by the rise in raw material prices this year and the increase in depreciation after the acquisition of cashmere assets. Depreciation began to be calculated in September last year. It is expected that the impact of this factor on the gross margin of the cashmere business will decrease in the second half of the year. 3) The wool strip business is expected to be mainly affected by price declines and changes in order structure; 4) The revenue and profit performance of the modification processing and dyeing business is impressive, and production capacity is expected to expand further in the future.

The wool-worsted production capacity plan is clear, and it will be gradually released from now until next year. 1) The 0.015 million spindle equipment involved in the second phase of the company's “0.06 million spindle high-grade worsted eco-yarn project” has been put into operation one after another, and is expected to contribute to the increase in the second half of this year; 2) Vietnam's “0.05 million high-grade worsted eco-yarn textile dyeing and finishing project” is progressing steadily according to the plan. The 0.02 million spindle phase of the project is expected to be completed and put into production one after another from the end of this year to 2025 3) The “0.02 million spindle high quality worsted wool (velvet) yarn construction project” in Yinchuan, New Zealand is scheduled to be completed in 2025 Production began one after another in the second half of the year.

Risk warning: weak overseas demand, falling short of expectations in developing new customers, systemic risk.

Investment advice: Steady growth in performance, optimistic about the expansion of the company's production capacity, and continuous market share. The company's wool spinning business is full of orders. As production capacity at home and abroad is released one after another, subsequent growth will accelerate. Based on a slight delay in Vietnam's production expansion schedule, we slightly lowered our profit forecast. The company's net profit for 2024-2026 is 0.45/0.51/0.58 billion yuan (previous value was 0.47/0.55/0.63 billion yuan), up 10.4%/15.2%/12.2% year over year; based on the profit forecast reduction, the target price was slightly lowered to 7.9-8.6 yuan (previous value was 8.4-9.0 yuan), corresponding to PE 13-14x in 2024, maintaining the “superior to market” rating .