23H1 revenue was +27%, net profit was +1% year over year, and revenue profit was lower than expected. In 2023H1, the company achieved revenue of 2.63 billion yuan, an increase of 27% over the previous year; Guimu's net profit was 150 million yuan, an increase of 1% over the previous year. The gross margin was 20.6%, down 1 pct from the previous year.

The growth rate of the new energy and body systems business has slowed, and the safety and power business has slightly exceeded expectations. According to the company's business split, 23H1, the company's new energy business revenue was 1.25 billion yuan, +58.1% year on year; car body systems business revenue was 4.2 billion yuan, -3.2% year on year, lower than our expectations. Safety systems business revenue was 390 million yuan, +43.1% year on year; power systems business revenue was 220 million yuan, +41.0% year on year, all slightly better than our expectations. The decline in body safety systems is mainly due to customer 22H2 starting to accumulate a large amount of inventory, which is reflected in the weakening demand for 23H1. In the long run, the demand for safety and power from traditional automobile customers is relatively rigid, and is expected to continue to grow. New energy power systems may also extend from automobiles to the field of robots in the future.

The smart driving network business is growing at a high rate, and the revenue ratio has increased. The company's 23H1 intelligent driving network business revenue was 200 million yuan, +117.7% year-on-year. As for ADAS related solutions from Horizon and other partners, starting with 23H1, more and more models will continue to enter the SOP. The second half of the year will go through a climbing phase, and delivery will begin in 2024. There is plenty of room for intelligent and localized development in the future, and it is expected that the share of revenue will continue to increase.

Demand for traditional cloud services is weak. The company's 23H1 cloud server revenue was 87 million yuan, -71.1% year-on-year, which was significantly lower than expected. Since 2023, new applications represented by ChatGPT have appeared, boosting investors' attention to data centers, and demand for AI-related cloud servers has increased dramatically. However, when the total amount of capital expenditure is certain, demand for traditional cloud services has been squeezed out. Coupled with the epidemic, cloud servers have been stocked and are still in the inventory removal stage, and the company's related revenue has declined.

The increase in the R&D expense ratio encroaches on profits, and gross margin has declined slightly. The company attached importance to R&D investment. 23H1 purchased testing and verification equipment and expanded personnel. As a result, R&D expenses grew faster than revenue, and R&D rates increased passively. Profits were eroded when the overall net interest rate was not high, resulting in net profit falling short of expectations. Considering gross profit margin alone, the company declined by 1 pct, mainly due to price pressure from car companies. We expect 23H2 to still have some pressure, and we need to observe signs of a pick-up on the demand side.

Profit forecast and investment rating: Due to weak demand and rising expenses, we lowered the company's net profit for 2023-2025 to $4.1 billion (-130 million yuan), $5.2 billion (-160 million yuan), and $6.1 billion (-190 million yuan), respectively, -2%, +28%, and +18%, respectively. Corresponding to the current price (closing on August 25), PE was 7.7 times, 6.1 times, and 5.1 times, respectively. Considering the company's abundant customer resources and full orders, we maintained the “buy” rating.

Risk warning: downstream automobile competition heightens risks, risk of changes in automakers' business models, risk of Hong Kong stock liquidity