Investment highlights:

Prices of major products fell, and 2024H1 performance declined year-on-year

On August 24, 2024, Ruihuatai released its 2024 semi-annual report: in the first half of 2024, the company achieved operating income of 0.132 billion yuan, a year-on-year increase of 8.16%; realized net profit attributable to shareholders of listed companies -0.036 billion yuan, a year-on-year decrease of 355.48%; and a weighted average return on net assets was -3.68%, down 2.90 percentage points from the previous year. The gross profit margin on sales was 17.40%, down 10.86 percentage points from the previous year; the net profit margin was -27.38%, down 20.88 percentage points from the previous year. Among them, in 2024Q2, the company achieved revenue of 0.077 billion yuan, -0.05% year-on-year, +41.25%; realized net profit to mother -0.02 billion yuan, -5847.21% year-on-year, -17.99% month-on-month; ROE was -2.01%, down 1.98 percentage points year on year and 0.34 percentage points month on month. The gross profit margin on sales was 14.04%, down 13.74 percentage points year on year, down 8.10 percentage points from month on month; net sales margin was -25.31%, down 24.88 percentage points year on year, and up 4.99 percentage points from month to month.

Affected by intensified market competition and changes in product structure, the company's sales volume increased 16.94% year on year, but due to falling sales prices, operating income only increased 8.16%; at the same time, the Jiaxing project was in the production capacity climbing phase, and the unit fixed cost was relatively high. The gross margin decreased 10.86 percentage points year on year due to falling sales prices and rising unit fixed costs; in addition, the increase in depreciation and fee interest after the Jiaxing project was put into operation caused management expenses and financial expenses to increase 26.04% and 138.80%, respectively.

In the first half of 2024, the company's high-performance PI film achieved revenue of 0.128 billion yuan, gross profit of 0.022 billion yuan, and gross profit margin of 16.80%; other PI films and processing achieved revenue of 0.002 billion yuan, gross profit of 0.001 billion yuan, and gross profit margin of 54.94%. In terms of period expenses, the company's sales/management/R&D/finance expense ratios for the first half of 2024 were 2.49%/17.27%/12.77%/12.51%, respectively, -0.05/+2.45/-0.42/+6.84pct. The increase in management expenses was mainly due to increased depreciation of the Jiaxing project plant; the increase in financial expenses was mainly due to an increase in interest expenses on loans. In the first half of 2024, the net cash flow from the company's operating activities was 0.035 billion yuan, a year-on-year decrease of 8.52%, mainly due to a decrease in tax refunds received.

Gross margin declined month-on-month and expenses increased month-on-month, putting pressure on Q2 results

With 2024Q2, the company achieved operating income of 0.077 billion yuan, which was basically the same year on year, +0.022 billion yuan; gross profit 0.011 billion yuan, -0.01 billion yuan year on month, -0.001 billion yuan month on month; net profit to mother -0.02 billion yuan, -0.02 billion yuan year on year, and -0.003 billion yuan month on month. The increase in revenue was mainly due to 2 new production lines being put into use in the second quarter of the Jiaxing project; the decline in gross profit was mainly due to a drop in product prices and an increase in fixed costs for the Jiaxing plant. In terms of period expenses, 2024Q2's sales/management/R&D/finance expenses were 0.02/0.012/0.009/0.009 billion yuan, which was the same year-on-year level/+0.02/+0.01/+0.006 billion yuan, and +0.01/+0.01/+0.001 billion yuan compared to the previous month. The company actively explores new product application markets and does a good job in small-batch application evaluations for customers. Among them, 3 high-performance products for semiconductor process protection and flexible circuit substrates have achieved tonnage small-batch sales, laying the foundation for further large-scale customer applications in the future.

The Jiaxing project is gradually being scaled up, and the CPI is in the process optimization stage

The construction of the company's 1,600-ton fund-raising project in Jiaxing has been basically completed, and the process stability of the production line and operation verification of various public and auxiliary systems have been promoted. Two of these production lines were put into use in September 2023, and 2 new production lines were put into use in the second quarter of this year, continuously improving the production efficiency and quality stability of the production line. The remaining 2 chemical production lines are undergoing process debugging and product debugging of the production line, verifying process stability, and promoting the entire line to be put into trial production. After the Jiaxing project is put into operation one after another, the additional production capacity will help improve the company's overall product layout capabilities and greatly enhance the company's ability to guarantee the supply of products in the electronics field. Multiple production lines provide more R&D and launch resources for multiple application fields and multiple product solutions, while multiple production lines guarantee production efficiency for the production of multiple categories of products. In the future, in line with changes in market demand, the company will accelerate the expansion of the electronics market and the new energy market while maintaining a relatively stable existing product structure, focusing on promoting new products such as TPI, PI for COF, and PI with high thermal conductivity, and improving the quality of operations.

The company independently mastered the core technology of CPI film preparation and successfully produced CPI film in 2018 based on the existing production line. The optical and mechanical properties of these products are excellent, and can be folded more than 0.2 million times. The key performance has been evaluated by domestic terminal brand manufacturers, and sample sales have been achieved for product testing by terminal brand manufacturers and their supporting suppliers; the optical grade pilot production line for the flexible OLED CPI film project being developed by the company is in the equipment and process optimization stage. After the construction of the CPI special production line is completed, it can be achieved The application of CPI film products in the field of flexible display electronic products such as folding screen phones is expected to fill the domestic gap in this field.

Profit forecasts and investment ratings

Affected by factors such as the slow recovery of the consumer electronics boom and falling product prices, we adjusted this profit forecast. We expect the company's revenue for 2024-2026 to be 0.3, 0.6, and 0.8 billion yuan, respectively, and net profit to mother of 0.001, 0.046, and 0.102 billion yuan, respectively, corresponding to 45 and 20 times PE from 2025 to 2026, respectively. The company's Jiaxing project is about to be launched. CPI projects are expected to expand, profits are expected to enter a period of rapid growth, and maintain a “buy” rating.

Risk warning

The risk of product performance falling short of expectations; the risk of technology proliferation; the risk of a large gap in business scale and product technology with internationally renowned companies; the risk of changes in product structure; the risk of new production capacity being difficult to digest after the implementation of the fund-raising project; the risk of changes in customer structure; the risk of technological innovation and product development falling behind market demand; and the risk of fluctuations in raw material procurement prices.