Revenue is growing steadily, and net profit is expected to recover in the third quarter. Dongfang Electric released its 2024H1 financial report. The company's 2024H1 achieved revenue of 33.46 billion yuan, a year-on-year increase of 11.8%, and achieved net profit of 1.691 billion yuan, a year-on-year decrease of 15.52%; 2024Q2 achieved revenue of 18.4 billion yuan, an increase of 21.09%; and net profit to mother of 0.786 billion yuan, a year-on-year decrease of 20.08%; judging from the revenue structure, the clean and efficient energy generation sector accounted for 42.04 %, up 8.7 pcts year on year; the renewable energy equipment sector accounted for 24.55% of revenue, up 1.40 pct year on year; the engineering and service sector accounted for 10.58%, down 9.81 pct year on year; the modern service sector accounted for 10.52% of revenue, up 2.47 pcts year on year. In the first half of 2024, the company achieved new efficiency orders of 56.073 billion yuan, an increase of 14.77% year on year, with sufficient growth momentum.

Gross margin is under phased pressure, and profitability is expected to increase in the future. The comprehensive gross margin of 2024H1 was 16.26%, down 2.30pct from the same period last year, of which the gross margin of the thermal power equipment section was 16.44%, down 2.58pct year on year, mainly affected by low price order delivery; the gross margin of the combustion engine equipment section was 11.70%, slightly down 0.18pct from the same period last year, which remained stable; the gross margin of the wind power equipment section was 7.44%, down 2.86pct year on year, mainly due to the decline in the winning bid price of fans; the gross margin of the engineering and service sector was 8.69%, down 8.61 pcts year on year. The main reason is the intensification of market competition and the overall decline in the gross margin of the new energy engineering contracting business; the gross margin of the 2024Q2 company was 13.96%, down 4.64pct from the previous year, and the company's profitability is expected to increase in the second half of the year.

3. The rate remains low, and R&D investment continues to increase. The company's expenses for the first half of 2024 were 1.297 billion yuan, up 11% year on year, less than the revenue growth rate. Among them, sales expenses were 0.705 billion yuan, up 2.45% year on year, management expenses were 1.34 billion yuan, down 0.17% year on year, three rates were 6.2%, down 0.3 pct year on year, maintaining a low level. R&D expenses increased 25.88% year on year in the first half of 2024.

Vigorously explore domestic and foreign markets, and have rich achievements in scientific research and innovation. On the domestic market side, stabilize the market order market, consolidate and enhance the dominant position of traditional industries, and accelerate breakthroughs in new industries and fields. We must continue to take the lead in promoting water, coal, nuclear, and gas. In overseas markets, domestic revenue for the first half of 2024 was 30.52 billion yuan. The year-on-year increase was 13.15%, and the overseas market achieved revenue of 2.94 billion yuan, a slight decrease of 0.19% over the previous year. The company has achieved breakthroughs in a number of key projects. The self-developed 15 MW heavy gas turbine has been assembled and put off the line, and the 500MW impact turbine with the largest stand-alone capacity in the world has passed the inspection.

Profit forecast and investment recommendations: Based on the company's order situation, we lowered the company's operating income in 2024-2026 to $69.69/77.68/82.71 billion yuan, respectively. Due to the decline in gross margin, we lowered our net profit to parent to $3.69/4.85/5.38 billion. According to the DCF model, we lowered our target price from HK$15.73 per share to HK$11.24 per share, maintaining the “better than market” rating.

Risk warning: 1. Relevant policies fall short of expectations; 2. Gross margin dropped sharply due to fierce market competition; 3. Prices of raw materials rose sharply; 4. Exchange rate risk.