Incident: The company released its 2024 mid-year report on August 12. 1H24 achieved revenue of 0.485 billion yuan, YoY +27.0%; net profit to mother of 0.216 billion yuan, YoY +17.4%; net profit after deducting non-attributable net profit of 0.207 billion yuan, YoY +18.2%. The company's performance is in line with market expectations. The company's 1H24 revenue achieved rapid growth mainly due to batch model production tasks and a continuous increase in orders for small-batch production of new products. Our comprehensive review is as follows:

2Q24 revenue increased 22% year over year; management expenses & phased subsidiary losses affected short-term profits.

1) Looking at a single quarter: 2Q24 achieved revenue of 0.24 billion yuan, YoY +21.7%; net profit to mother of 0.101 billion yuan, YoY +6.3%; after deducting non-net profit of 0.095 billion yuan, YoY +8.1%. 2Q24 gross margin decreased by 3.3 ppt to 53.7% year over year; net margin decreased by 7.9 ppt to 40.0% year over year. 2) Looking at the first half of the year: 1H24 gross margin decreased by 1.8 ppt to 56.3% year on year; net margin decreased by 5.3 ppt to 42.1% year on year. The decline in the company's 1H24 profit margin was mainly due to increased management expenses and phased losses in new businesses (subsidiaries) nurtured. According to preliminary calculations, the total impact of the five holding subsidiaries on net profit attributable to mother was about -10.99 million yuan, compared to about -4.68 million yuan in the same period last year.

Forwardly lay out the aviation development and new materials business, and wait for the rapid development of the subsidiary. See subsidiary companies, 1H24:

1) Huaqin Aviation achieved revenue of 23.76 million yuan, with no product sales in the same period last year (achieving revenue of 11.02 million yuan for the full year of 2023); realized net profit -6.92 million yuan, -2.31 million yuan for the same period last year; 2) Huaqin Optoelectronics achieved revenue of 1.02 million yuan, 1.34 million yuan for the same period last year; realized net profit of -9.09 million yuan, and 4.06 million yuan for the same period last year. The other three holding subsidiaries had relatively small revenues. In terms of capacity building, 1) Huaqin Aviation Development: Part of the 1H24 production line has begun the first product verification and trial production, striving to achieve full commissioning in the second half of 2024, and has begun to obtain certification of the entire component contract to achieve the transformation from material processing to parts manufacturing. 2) Huaqin Guangsheng: The business has gradually entered the engineering stage of actual application. 3) Shanghai Ruihuasheng: Actively carry out pre-project construction work and strive to achieve trial production of some production lines in the second half of 2024. The company's fund-raising projects and subsidiary capacity building are progressing steadily, and some will enter the production harvest period one after another in the second half of 2024.

Demand for mass production projects is strong; actively expand production and stocking to meet strong downstream demand. In terms of expenses, the cost rate increased by 1.5ppt to 15.7% year-on-year during the 1H24 period, of which: 1) R&D expenses decreased by 1.8ppt to 6.8% year over year; 2) management expenses increased 1.5ppt to 6.7% year over year, mainly due to increases in equity payments, employee remuneration, and rental expenses. In terms of orders, from the beginning of '24 to the date of publication of the interim report, the company has disclosed contract announcements for 3 batch production projects, with a total amount of 0.774 billion yuan (tax included), or reflecting high demand for downstream batch production models. By the end of 24H1, 1) the company's inventory had increased by 59% to 0.2 billion yuan compared to the beginning of '24, mainly due to an increase in orders and an increase in the cost of issuing products and contract execution; 2) Construction in progress increased by 65.8% to 0.76 billion yuan from the beginning of '24, mainly due to the parent company's fund-raising project and the construction of the Huaqin Airlines production line. The company is actively expanding production and stocking to meet strong downstream demand.

Investment advice: The company is a leading stealth materials enterprise in China. Based on its advantages in the field of medium and high temperature stealth materials, the company is actively expanding supporting capabilities in the aviation development industry chain. At the same time, the company is also continuously expanding new business directions to open up room for growth. We are optimistic about the company's development prospects. We expect the company's net profit to be 0.5 billion, 0.68 billion, and 0.89 billion yuan from 2024 to 2026, corresponding PE to 29/21/16x, maintaining the “recommended” rating.

Risk warning: downstream demand falls short of expectations; mass production progress of new models falls short of expectations, etc.