Incident: The company released its 2024 semi-annual report, which is basically in line with expectations. The company released the 2024 semi-annual report. 2024H1 achieved operating income of 5.037 billion yuan, a year-on-year decrease of 1.7%; net profit of 0.683 billion yuan, a year-on-year decrease of 4.8%.

The scale and market share of the private brand business continued to increase. In terms of the year-on-year increase in gross margin by business, 2024H1's own brand business/business for corporate customers achieved operating income of 1.116/3.922 billion yuan, a year-on-year change of +71.9%/-12.3%. In the first half of the year, the oral suction XROS iteration version and the lung suction GEN iteration version were launched, helping to further increase the market share of the private brand VAPORESSO. Looking at regional segments, the 2024H1 private brand business achieved revenue of 0.929/0.187 billion yuan, an increase of 88%/20.6% year over year; in the business for enterprise customers, the United States/Mainland China/Europe and other regions achieved revenue of 1.858/0.088/1.976 billion yuan, a year-on-year change of -9.8%/+41.4%/-16.0% year-on-year. The Hong Kong market is mainly responsible for the transit and trade of international customers. The mainland China market also includes revenue from final sales to the international market. Due to the increased regulation of the electronic atomization market by European and American countries, the special atomization product business in the US market is in a recovery period; traditional disposable products in the European market have been greatly affected, but the revenue trend of bomb exchange products is gradually improving. 2024H1 gross margin was 38.0%, up 1.8 percentage points.

Main reasons: 1) Increased business scale and market share of private brands with higher gross margins. 2) Expand the range of products that reduce costs and increase efficiency, and promote cost reduction.

Increase investment in marketing and continuously improve R&D capabilities

The 2024H1 sales/management/R&D/finance expenses ratio was 7.44%/6.73%/15.09%/0.38%, respectively, +3.37/ -2.37/+3.08/+0.16 percentage points year-on-year, respectively. The increase in the sales expense ratio is mainly due to 1) increasing the development of international markets and increasing the remuneration of marketers; 2) increasing promotion expenses related to atomizing beauty product solutions, and increasing the promotion of electronic atomization and special use atomization products in the international market. The reduction in the management expense ratio is mainly due to the company's continuous implementation of cost reduction and efficiency measures, strengthening the budget management system, and continuing to carry out amoeba operations, which greatly improved management efficiency. The increase in R&D cost rates is mainly due to companies increasing investment in products in the fields of atomization medicine and heating without combustion.

Investment advice

We believe that under the trend of stricter global regulations, industry concentration will increase at an accelerated pace, while the company relies on compliance capabilities, technological leadership, a healthy customer structure and an open and flexible business model, competitive barriers are highlighted, and market share is expected to continue to increase. Furthermore, the nebulization medical/beauty/HNB business layout of the company is expected to gradually enter the expansion stage, providing new growth in performance. Based on the interim report results, we expect the company's 2024-2026 revenue to be 11.811/13.583/15.033 billion yuan, respectively, up 6%/15%/11% year-on-year, respectively; net profit to mother will be 16.32/19.15/21, respectively.

3.4 billion yuan, -1%/+17%/+11%, respectively. As of September 3, 2024, the total share capital and EPS corresponding to the closing market value were $0.27/0.31/0.35, respectively, and the corresponding PE was 31.38/26.75/23.99 times, respectively. Maintain a “buy” rating.

Risk warning

Policy uncertainty; new business falling short of expectations; increased industry competition; exchange rate fluctuations, etc.