Event: Smore International releases its 2024 semi-annual report. 2024H1 achieved operating income of 5.037 billion yuan, a year-on-year decrease of 1.67%; net profit to mother was 0.683 billion yuan, a year-on-year decrease of 4.76%.

The growth rate of 24H1's own brand is impressive. Sales revenue for enterprise customers is recovering quarterly by business type. The company's 2024H1 private brand business/ODM revenue was 1.116/3.922 billion yuan, respectively, up 71.94%/-12.35% year-on-year. In terms of free brands, the European and other markets/US revenue was 0.929/0.187 billion yuan respectively, up 88.0%/20.6% year over year. The company accurately gained insight into user needs and launched the XROS iterative version of XRO 4, which once again became a hot product in the market. The market share of its own brand VAPORESSO in the field of open products continues to increase, and it has become the leading market brand in this field. 24H1's own brand revenue is growing rapidly. In terms of sales to corporate customers, the US and Europe achieved revenue of 1.858/1.976 billion yuan respectively, a year-on-year decrease of 9.8%/16.0%. In the US market, the company's main customers maintained the top position in the US in the closed bomb exchange product category. At the same time, they benefited from strengthened enforcement. The US was recovering quarterly. Q2 revenue increased by about 6.1% month-on-month and 6.5% year-on-year. In the European market, regulations are gradually being strengthened, reducing demand for traditional disposable (disposable electronic atomization products that cannot be charged or exchanged), and demand for new closed and open products is rising, favoring compliance leaders. The company's revenue from closed bomb exchange products grew rapidly from quarter to quarter. In Q2, revenue from closed bomb exchange products in Europe and other markets increased 93.2% month-on-month and 22.5% year-on-year.

The 24H1 structure optimizes the gross margin, and increases the net profit margin slightly under pressure. In terms of profitability, the gross margin of the 2024H1 company was 38.0%, an increase of 1.8 pct over the previous year. 24H1 gross margin increased year-on-year, mainly due to 1) an increase in the share of high-margin private brands; 2) The company expanded the range of products covered by cost reduction and efficiency through Amoeba operations, and successfully promoted cost reduction.

In terms of period expenses, 2024H1's distribution and sales expenses rate/management expense ratio/R&D expenses ratio were 7.4%/6.7%/15.1%, respectively, an increase of 3.2/-2.4/3.1 pct over the previous year. The company's share of OBM increased, and sales expenses increased year-on-year; R&D efforts continued to increase, and R&D expenses increased year-on-year. Under the combined influence, the company's 24H1 adjusted net interest rate was 13.6%, a year-on-year decrease of 0.4 pct.

Investment advice: As a global leader in electronic atomization, Smore International continues to increase R&D and leads in technical strength. With the gradual steady recovery of the US and China markets and the continuous expansion of new products and new businesses, long-term growth can still be expected. We expect Smore International's 2024-2026 revenue to be 12.357, 14.024, 15.702 billion yuan, up 10.65%, 13.49%, and 11.96% year over year; adjusted net profit will be 1.694, 1.891, 2.164 billion yuan, up 0.95%, 11.64%, and 14.43% year over year, corresponding PE of 31.6x, 30.8x, 27.6x, for 2024 47.5xPE, corresponding target price 13.03 The dollar, or HK$12.12 (converted at the RMB exchange rate of HK$0.92), maintains a buy-A investment rating.

Risk warning: Risk of industry regulations exceeding strict expectations; risk of atomization technology path being disrupted; risk of new business development falling short of expectations; risk of majority shareholders' holdings reduction; risk of OEM products not being reviewed; risk of customer order growth falling short of expectations.