Incident: On August 22, 2024, the company released its 2024 semi-annual report. 24H1 achieved revenue of about 2.335 billion yuan, -19.78% year-on-year, net profit to mother of about 0.083 billion yuan, or -49.77% year-on-year, net profit without return to mother of about 0.069 billion yuan, or -58.68% year-on-year. Looking at a single quarter, 24Q2 achieved revenue of about 1.516 billion yuan, -16.16% year on year, net profit to mother 0.073 billion yuan, or -53.69% year on year. After deducting non-return net profit, about 0.06 billion yuan, or -62.46% year over year.

Demand in the building ceramics market is weak, and the engineering business continues to be actively contracted. In the first half of 2024, the overall effective demand in the building ceramics market was weak, and competition further intensified. 24H1 achieved a total revenue of 2.335 billion yuan, or -19.78% over the same period last year. In terms of gross margin, 24H1's gross margin was about 26.83%, or 1.09pct year on year. Looking at a single quarter, 24Q2's gross margin was about 27.00%, or -3.00pct year on year. The price war may have heated up, putting pressure on the company's sales volume and sales price. By channel, 24H1's distribution business revenue was 1.766 billion yuan, down 4.26% year on year, accounting for 75.63% from 64.63% at the end of 23; engineering strategy business revenue of 0.569 billion yuan, a sharp drop of 46.64% year on year, accounting for 24.37% from 35.37% at the end of 23, mainly because the company adopted omni-channel strengthening of distribution business and actively abandoned some engineering orders with long account periods, high collection risk, and low gross profit levels, or the company's response channel structure reshaped significantly Progress, short-term performance is under pressure, but in the long run, the company's business model is becoming more reasonable.

Management expense ratios have risen a lot, and operating cash flow has improved markedly. The 24H1 company's expense ratio was 21.27%, +2.43pct year-on-year, with sales/management/R&D/finance expenses ratios of 6.23%/9.52%/3.74%/1.78%, respectively, -0.39%/+2.14%/+0.34%/+0.35%, respectively. The 24Q2 company lost 0.025 billion yuan in credit impairment, an increase of 0.023 billion yuan compared to 24Q1. Judging from the size of accounts receivable, 24H1's accounts receivable balance was 0.993 billion yuan, -11.86% year-on-year. During the same period, the company achieved revenue of 2.335 billion yuan, or -19.78% year-on-year. 24H1's operating cash flow was 0.376 billion yuan, a sharp increase of 123.25% over the previous year. It was mainly due to the company strengthening collaborative management of production and marketing, optimizing the inventory structure, strengthening receivables management, and introducing various sales policies to promote sales repayment.

The green development strategy continues to advance in line with industry trends. China's building ceramics production peaked in 2016, and then showed a fluctuating downward trend. According to statistics from the China Building Sanitary Ceramics Association, in 2023, the country's production of building ceramic tiles was 6.73 billion square meters, down 8.0% from the previous year. Stocks and even shrinking competition combined with the gradual tightening of dual-carbon energy consumption policies will further transform the industry towards high-quality development that is green, environmentally friendly, low-carbon and energy-saving. The 2024 government work report mentioned “meeting diverse improvement needs” for the first time, or encouraging building materials companies to work together to build green, low-carbon, smart, and healthy home spaces. 24H1 has improved the quality and efficiency of R&D and production, and optimized product formulations and processes. During this period, the Guimeng base's rooftop photovoltaic project was put into use. The Guangmeng base used a production line to transform ammonia hydrogen zero carbon combustion technology, reflecting the company's active exploration of carbon reduction and carbon reduction paths in the ceramic industry, vigorously promoting clean production, transformation and upgrading of the industry. Relevant environmental protection technology is outstanding.

Investment advice: We believe that the clean-up of the industry is progressing at an accelerated pace, the company still has leading scale, channel, environmental protection and brand advantages as an industry leader, and the overall performance is still resilient after a painful period of channel transformation.

We maintain our previous profit forecast. The company's net profit for 24-26 is estimated to be 2.84, 3.57, and 450 million yuan. The current price corresponds to PE of 10.88, 8.65, and 6.87 times, respectively, to maintain the “increase in holdings” rating.

Risk warning: Real estate completion repair falls short of expectations, industry competition intensifies, new production capacity is difficult to digest, and prices of raw materials and fuel fluctuate greatly.