1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 20.895 billion yuan, +1.7% YoY, net profit to mother of 1.399 billion yuan, +2.3% YoY. Among them, 2Q24 revenue was 10.607 billion yuan, +0.7% YoY, and net profit to mother was 0.763 billion yuan, +1.6% YoY. The company's 1H24 performance was in line with our expectations.

Engineering business revenue bucked the trend and continued to grow, and overseas expansion progressed rapidly. 1H24 signed a new engineering service contract worth 24.146 billion yuan, -18% over the same period last year. Among them, new domestic signings were 4.421 billion yuan, -58% year over year, and 19.726 billion yuan were new overseas signings, +4% year over year. The company continued to push forward contract execution. In the first half of the year, project revenue was 12.099 billion yuan, up 4.82% against the trend, and the gross profit margin was 15.54%, +0.62ppt compared to the previous year. The pressure on the equipment business is quite obvious, but the “two external” expansion is already beginning to bear fruit. The amount of new contracts signed by 1H24's equipment business was -15% to 3.344 billion yuan, of which 2.103 billion yuan was newly signed domestically, -33% over the same period, and 1.241 billion yuan overseas, maintaining a rapid increase of +58% over the same period last year. 1H24's equipment business revenue was 2.916 billion yuan, -23.07% YoY, gross profit margin 23.25%, YoY -0.51 ppt. Currently, the company's self-sufficiency rate for the top ten core mainframe equipment exceeds 60%, and it is also focusing on promoting the “two foreign” strategy for the equipment business. In the first half of the year, the equipment business accounted for 32% of overseas revenue, and the foreign industry accounted for 49% of revenue. The operation and maintenance business improved quality and growth rate, and the overall performance was outstanding. 1H24 signed a new contract amount of 8.897 billion yuan for operation and maintenance business, +41% year over year, of which 5,527 billion yuan was signed for mine operation and maintenance, +47% year over year. 1H24's operation and maintenance business revenue was 5.673 billion yuan, +22% year over year, gross profit margin 21.93%, a significant improvement of 3.18ppt year over year. By the end of 1H24, the company had implemented 348 mine operation and maintenance projects, with a mineral supply of +9% year-on-year, and implemented 62 cement operation and maintenance service production lines, providing an annual production capacity of more than 0.1 billion tons. The fee rate has increased, which is greatly affected by exchange. 1H24's sales/management/finance expense ratio was 0.07pp/+0.59pp/+0.73ppt compared to the same period. The cost ratio increased, mainly due to small currency exchange rate fluctuations in the first half of the year, which confirmed an exchange loss of 0.217 billion yuan. Cash flow performance is strong. The net cash flow from 1H24's operating activities was 0.885 billion yuan, compared to -0.94 billion yuan in the same period last year. During the reporting period, the company strengthened contract settlement and actively supervised repayment, with outstanding results.

Development trends

The business model has improved, and the company has great potential for growth. We believe that as the drag on domestic projects gradually weakens, demand for technical improvement and stable overseas construction demand is expected to drive the company's engineering business to maintain a stable volume.

The company's equipment business is also expected to increase penetration and open up sales space in foreign industries through a “two foreign” strategy, and increase revenue and profit contributions. The recent growth trend in the operation and maintenance business is impressive. We believe that the safety and environmental protection requirements of mine operation and extensive cement line operation and maintenance requirements are expected to continue to drive the company's operation and maintenance business to continue to grow in scale. We believe that the company has deep potential for medium- to long-term growth, and gross margin still has room to rise.

Profit forecasting and valuation

We maintain the 2024/25E net profit of 3.415 billion yuan/3.9 billion yuan unchanged, and the current stock price corresponds to 2024/25E 7.4x/6.5x P/E. We maintain an outperforming industry rating and target price of 14.7 yuan, corresponding to 2024/25E 11.4x/10.0x P/E, implying 54% upward space.

risks

The growth of the equipment and operation and maintenance business fell short of expectations, and progress in contract execution fell short of expectations.