1H24 results slightly below our expectations

The company announced 1H24 results: revenue of 1.587 billion yuan, -11.4% year on year; net profit to mother of 0.096 billion yuan, corresponding to profit of 0.17 yuan per share, -14.5% year-on-year, mainly affected by a significant slowdown in downstream market demand. 2Q24 achieved operating income of 0.786 billion yuan, -21.8% YoY; net profit to mother 0.032 billion yuan, or -52.5% YoY. Due to the slowdown in downstream demand, the company's second-quarter and 1H24 results fell slightly short of our expectations.

The gross margin has been rising steadily, and the expense ratio has risen slightly. In 1H24, the company achieved gross profit margin of 26.7% and net profit margin of 6.0%, +2.3ppt and -0.2ppt, respectively. In 1H24, the company's sales expenses rate was 5.2%, a year-on-year decrease of 1.1 ppt, mainly due to the company's continuous strengthening of cost control capabilities to reduce costs and increase efficiency; the management expense ratio was 2.9%, an increase of 0.8ppt; and the R&D expenses rate was 9.8%, a year-on-year decrease of 1.0ppt.

By business: 1) The company's pulsed fiber lasers achieved revenue of 0.191 billion yuan, a year-on-year decrease of 11.01%, a year-on-year increase of 4.01ppt; 2) continuous fiber lasers achieved revenue of 1.263 billion yuan, a year-on-year decrease of 14.21%, mainly due to the impact of downstream demand. The gross profit ratio was 25.5%, an increase of 1.05ppt; 3) Ultrafast lasers achieved revenue of 0.031 billion yuan, an increase of 9.40% year on year; 4) Special fiber achieved revenue 0.043 billion yuan. During the reporting period, the company's holding company Ruixin Optical achieved operating income of 0.148 billion yuan and net profit of 0.041 billion yuan.

Development trends

The overall growth rate of the laser industry is limited, and overseas markets may bring new opportunities. After intense competition in laser prices since 2019, IPG, Radical Laser, and Chuangxin Laser have formed a three-legged competitive pattern. We judge that the laser industry is gradually entering a period of stability, but the overall domestic growth rate based solely on cutting scenarios is relatively limited. Since last year, cost-effective medium- and low-power domestic laser cutting machines have driven new downstream demand in the laser industry. We judge that the overseas share of medium- and low-power laser cutting machines is currently around 25%-35%. We believe that as leading companies in the lithium battery industry expand overseas, the company will gain more opportunities as a core light source supplier; booming industries such as ships are expected to continue to drive demand for ultra-high power laser cutting machines.

Profit forecasting and valuation

Considering there is some uncertainty about downstream demand, we lowered the company's 2024 profit forecast by 13.5% to 0.281 billion yuan, and the 2025 profit forecast was lowered by 15.5% to 0.324 billion yuan; the current stock price corresponds to 28.0 times/24.2 times the price-earnings ratio for 2024/2025. Considering the company's stable position as a leader in domestic lasers, we maintained an industry rating. Considering that there is still further price reduction pressure in the second half of the year, we lowered our target price by 29.8% to 18.0 yuan, which corresponds to 36 times the 2024 price-earnings ratio and 31.4 times the 2025 price-earnings ratio. There is 29.6% upside compared to the current stock price.

risks

The recovery in market demand fell short of expectations; the expansion of new products fell short of expectations.