Incident: The company released its 2024 semi-annual report: 24H1 achieved revenue of 0.555 billion yuan, +9.42% year over year; net profit to mother was 0.117 billion yuan, -16.57% year over year; net profit after deducting non-return to mother 0.1 billion yuan, +5.73% year over year. Among them, 24Q2's single quarter revenue was 0.307 billion yuan, +6.76% year over year; net profit to mother was 0.074 billion yuan, -12.21% year over year; net profit without return to mother was 0.061 billion yuan, -2.22% year over year.

The scale of revenue has increased steadily, and the 24H1 profit side is under slight pressure

1) The company's revenue scale continued to expand, and gross margin remained high: during the period 2019-2023, CAGR was 9.70%/14.29%, respectively. The gross margin remained above 38% during the period, and the net margin increased steadily from 24.75% to 31.27%. 2024H1 achieved revenue of 0.555 billion yuan, or +9.42% year over year; net profit to mother was 0.117 billion yuan, -16.57% year over year, mainly due to changes in the fair value of Chicheng shares, which reduced the fair value of the company by 21.105 million yuan, affecting non-operating net profit of 17.9393 million yuan during the reporting period. 24H1's gross margin and net margin were 43.43%/23.55% respectively, up +0.8/-5.8pct year on year. Net profit margin in the first half of the year was under pressure.

2) Looking at the cost side, the subsidiary also showed a slight increase in the 24Q2 single quarter expenses: 24H1's sales/management/finance/R&D expenses ratio was 6.29%/7.38%/1.19%/8.65%, respectively, +0.7/+0.3/+0.6/+0.2pct.

24H1's overall expense ratio increased slightly year-on-year, mainly due to the addition of new consolidated subsidiaries.

3) From a regional perspective, the company's domestic market performance is improving, and there is a large profit margin in overseas markets: in 2023, the company's domestic and overseas revenue accounted for 72.64% and 27.36%, respectively, and its revenue in China was +2.94%; overseas gross margin was 55.44%, which is significantly higher than domestic 38.64%. According to the company's 2016 semi-annual report, the company has now developed more than 2,000 overseas customers in more than 140 countries around the world, and overseas market revenue accounts for more than 30% of the mechanical sensors field.

4) By product, the mechanical sensor and instrument series is the company's main revenue source: in 2023, the mechanical sensor and instrument series achieved revenue of 0.663 billion yuan, +1.20% year-on-year, accounting for 66.04% of revenue, 41.39% of gross margin, +4.99% year-on-year; industrial IoT and system integration revenue reached 0.314 billion yuan, -0.89% year-on-year, accounting for 31.30% of gross margin; revenue of other physical sensors 0.013 billion yuan, gross profit margin 23.19%; platform-based product revenue 0.014 billion yuan, gross profit margin 34.95%.

Abundant operating cash flow protects high-quality development. In 2019-2023, the company's net operating cash flow remained fluctuating around 0.2 billion yuan. 24H1's net operating cash flow was 0.069 billion yuan, +84.46% over the same period. The performance was impressive, which is conducive to supporting the company's subsequent business development.

Deploy multiple physical sensors to create a platform-based enterprise ecosystem. Since 2011, the company has maintained the number one share in the domestic market for mechanical sensors for 14 consecutive years, and has continuously strengthened the “moat” of individual champions in the national manufacturing industry. In 2023, the company promoted research and development of “tension+inclination”, “weighing+inclination”, and “temperature+pressure”, etc., and laid out strategic investments in 11 projects including light curtain sensors, pressure sensors, automated Chinese food production lines, and coal and mineral networking to help transform from a single physical quantity to a multi-physical sensor enterprise, create a sensor forest strategic layout, and enhance enterprise competitiveness. 24H1 has successively controlled Ningbo Zhixing IoT Technology and Shanghai Feixuan Sensors through “reinvestment”, further increasing its investment in the smart warehouse field and current sensor field, and deepening the segmented circuit. At the same time, pre-investment due diligence and related work for Suzhou Yushan Sensor Technology (Water Quality Sensor Company) was completed, and the delivery was completed in August to be included in the scope of the company's consolidated statement. At the same time, the company signed an investment agreement with Ningbo Midsquare Semiconductor. The latter will provide high-quality and cost-effective “domestic replacement” chips for the company's parent and subsidiary companies.

Accelerate the construction of an industrial brain platform and promote a new ecosystem of sensors. The smart sensor industry relies on platforms to gather industry enterprises to provide diversified services and support to the government, sensor companies and the industrial chain, and build a platform-based ecological chain for resource collaboration and common development. On January 6, 2023, the company-led industrial brain platform officially began operation, building 8 major business scenarios. By the end of June 2024, more than 1,200 enterprises had entered the chain and integrated 18 competency components with the Zhejiang Industrial Brain Competence Center. The company deepens the industrial Internet of Things industry, increases investment in technology companies such as Keliyun Whale and Deco Intelligence, and provides digital and automation services for industrial platforms to help circulate within the industrial ecosystem.

Strong R&D strength and rich certification qualifications. 1) R&D: The company's R&D focuses on R&D investment. In 2019-2023, the R&D expenditure rate increased from 5.36% to 9.13%, and 24H1 also reached 8.65%. As of 2023, the number of R&D personnel in the company accounted for 7.04% of the total number of people in the company. It already has 760 patents and 459 computer software copyrights (excluding participating subsidiaries), building a high-tech barrier in the sensor industry. 2) Certification: As of 2019, the company's products have obtained 50 certifications for domestic special equipment type test certificates, explosion-proof certificates, lightning protection test reports, dustproof and waterproof test reports, as well as more than 100 foreign certifications such as OIML, NTEP, CE, etc., to help enterprises control quality.

Multi-dimensional force sensors are expected to open up room for the company to grow. According to the China Business Industry Research Institute, the domestic six-dimensional force sensor market was 0.234 billion yuan in 2023, and industrial automation (including traditional robots) and humanoid robots accounted for 77% and 1.6% respectively in downstream applications. The six-dimensional force sensor market is expected to grow to 0.271 billion yuan in 2024. Based on deep technology accumulation, the company focuses on developing six-dimensional force sensors for industrial robots, joint torque sensors and multi-dimensional sensors for humanoid robots to broaden the broad prospects of robots and high-end equipment. By the end of June 2024, the company's six-dimensional force/torque sensors had completed product series development for humanoid robot wrists, ankles, industrial arms, and collaborative arm terminals, mastered key technical points such as structural decoupling, algorithm decoupling, and high-speed sampling communication, and had sent samples to many domestic collaborative robot and humanoid robot customers. The company plans to continue to make breakthroughs in the fields of miniaturization, high-frequency response, MEMS silicon-based, and force control algorithm integration. In addition, the company's tactile sensors have begun cooperation with many companies and universities, and are also being developed using a self-developed model. Currently, they are still in the R&D verification stage.

Profit forecasting and valuation. As a leader in the domestic strain load sensor industry, the company is actively transforming into a comprehensive enterprise focusing on multiple physical sensors and IoT platforms. At the same time, the company is following the development trend of the robot industry and is actively laying out the field of robot force sensors, which is expected to open up new growth space. We expect the company's net profit to be 0.327/0.408/0.516 billion yuan in 2024/2025/2026, and EPS of 1.16/1.45/1.83 yuan. Considering the company's leading mechanical sensor company, the endogenous+epitaxial two-wheel drive company continued to grow and was covered for the first time. We gave the company a 21-25 times PE valuation in 2024. The reasonable value range was 24.38-29.03 yuan/share (the company's EPS is expected to be 1.16 yuan in 2024), corresponding to a reasonable market value of 6.9-8.2 billion yuan, which is “superior to the market” rating.

Risk warning: Projects such as humanoid robots fall short of expectations, foreign investment falls short of expectations, risk of impairment of goodwill, increased market competition, macroeconomic cycle fluctuations, and risk of performance falling short of expectations.