Key points of investment

24H1 revenue +7% year-on-year, net profit/net profit deducted from non-net profit +5%/+23% year-on-year, and performance was in line with market expectations. 24H1 revenue of 10.34 billion yuan, +7% YoY, net profit/net profit of 0.45/0.47 billion yuan, YoY +5%/+23%; of these, Q2 revenue was 5.63 billion yuan, +18% YoY, net profit/net profit to mother 0.25/0.28 billion yuan, +4%/+34% YoY, Q2 net operating cash flow was 0.44 billion yuan, with a significant increase in accounts receivable.

Management optimization is ongoing, and profitability is steadily improving. H1/Q2 gross margin reached 18.9%/19.8%, and Q2 gross margin was +2.5pct/+2.1pct; the company improved gross profit through centralized procurement and standardized design. By product, switches had the highest improvement (subsidiary Xikai H1 net profit of 0.27 billion yuan), followed by transformers. Q2 Net profit margin after deducting non-return to mother reached 5.0%, +0.5pct/+1.0pct YoY.

Q2 Sales/management/R&D/finance cost rates were 3.4%/6.4%/3.9%/-0.4%, respectively, +0.1/+0.9/+0.4/-0.6pct year-on-year, respectively. In terms of cost investment, the State Assets Administration Commission assesses one-profit and five-rate ratio (including R&D), so the company maintains investment in R&D expenses; at the same time, the power grid is booming and the new chairman's marketing department focuses on sales, so sales expenses are growing rapidly. Winning the first bid in H1 within the company's network also confirms the investment results. The increase in actuarial expenses in management expenses has led to an increase in total employee remuneration, and the company continues to promote the reduction of redundant staff.

Mainnet and UHV H2 will accelerate the pace of bidding and delivery, and profit flexibility will soon be released. 1) UHV: Currently, the industry is booming, and the industry's conversion capacity is close to full production. The company explores opportunities through industrial park investment, technical reform, etc. H1 mainly delivers products such as converter transformers from Longdong-Shandong, and we expect a slight increase in revenue over the same period last year. The pace of H2 delivery is expected to accelerate (especially Q4 centralized delivery), and Jinshang-Hubei delivery is expected to contribute even more. 2) Non-ultra-high voltage within the network: H2 State Grid transmission and transformation tenders are increasing at an accelerated month-on-month rate, and the bottom up in distribution network investment will also drive the increase in power distribution equipment. In Q3, tenders for the 3rd and 4th batch transmission and transformation projects of the State Grid all increased by about 30% year-on-year, winning the bid for 1.55 billion/1.2 billion, with a market share ratio of 9.0%/9.9%, and the market share ratio 1 (7.6% share in 23 years, 1st market share). 3) Off-network: We expect to grow faster than in-network business, mostly from new energy sources and overseas, and label a number of projects in countries such as Malaysia, Bangladesh, and Cambodia. However, off-grid gross margin is generally lower than in-network (having overseas EPC projects can also drag down overall gross profit; H1 Western Power International's net profit is 4.3 million), and the profit contribution is average.

Profit forecast and investment rating: Considering the divestment of Xidian Finance's subsidiary, the company's net profit for 24-26 was lowered to 1.11/1.84/2.28 billion yuan (previous value was 1.25/2.05/2.51 billion yuan), compared to +25%/+65%/+24%, corresponding PE was 32/19/16 times, respectively, given 25 times PE in 2025, with a target price of 9.0 yuan. Considering the company's stable position as a leading equipment manufacturer, the “buy” rating was maintained.

Risk warning: Overseas market expansion falls short of expectations, raw material price increases beyond expectations, etc.