Event: In the first half of 2023, the company achieved total operating income of 3,838 billion yuan, a year-on-year increase of 5.03%, net profit of 565 million yuan, a year-on-year increase of 13.999%, net profit of non-attributable income of 596 million yuan, a year-on-year increase of 94.54%, and net operating cash flow of 1,283 billion yuan, an increase of 217.87% over the previous year.

Profitability continues to increase, and the scale of payment service transactions is growing steadily: 1. The smart terminal cluster had revenue of 1,532 billion yuan in the first half of 2023, down 7.72% from the previous year. The main reason is that the domestic market is affected by the economic cycle, and overall demand release is still slow. (1) Digital payment terminals: A number of smart POS models were successfully shortlisted by ICBC and other state-owned banks, and smart POS shipments increased by more than 80% over the same period last year. Sales revenue in Latin America increased more than 33% year over year in the first half of 2023. In the first half of 2023, the company achieved a total sales volume of more than 4 million units of smart POS and other products, of which overseas sales exceeded 2.1 million units, and overseas business revenue accounted for more than 77%. (2) In terms of intelligence knowledge, business revenue in overseas markets increased by 14.40% year on year in the overseas market for half a year, of which business revenue in the North American market increased by 89.70% year on year. 2. Industry digital cluster. Revenue for the first half of 2023 was 2,299 billion yuan, up 15.73% year on year. It was mainly due to the recovery in offline consumption and the increase in transaction scale of micro, small and medium-sized merchants, mainly in the catering and retail industries. In the first half of this year, the payment service transaction scale was 1.30 trillion yuan, an increase of 17.73% over the same period last year. In terms of gross margin, the gross margin for electronic payment products, information reading products, merchant operations and value-added businesses in the first half of 2023 was 38.3%/41.1%, respectively, up 12.3 and 10.1 percentage points from the same period of the previous year. The net return interest rate was 14.7%, up 8.25 percentage points from the same period last year, and profitability continued to increase.

The company actively lays out various fields such as perceptual AI, cognitive AI, and face recognition algorithms: in the perceptual AI dimension, the company has launched edge intelligent gateway products and special AI modules for operators such as China Tower, and also lays out localized coverage of edge gateway chips and devices to build a trusted edge computing ecosystem. In terms of face recognition algorithms, the company has achieved technological expansion from payment scenarios to security scenarios, and has passed a security level inspection standard by the Public Security Agency. The prosthesis inspection pass rate is over 95%, and the real person pass rate is 100%. In terms of cognitive AI, the company collaborated with the Zidong Taichu University Model of the Institute of Automation of the Chinese Academy of Sciences, the ChatGLM Open Source Model of Tsinghua University, and the Baichuan Intelligent Open Source Model to improve the accuracy of existing neural network models while achieving rapid training support for new tasks and shortening the development cycle. Up to now, the company's large model application services have covered operators, educational institutions and other fields.

Profit forecast, valuation and rating: Considering the gradual increase in the company's payment business flow, the increase in comprehensive services provided to merchants, and the rapid growth of hardware overseas, the company's revenue forecast for 23-25 was raised to 97/121/147 billion yuan, +3%/+6%/+8% compared to the previous forecast. Considering that the company's reduction in subsidies to merchants and channel led to a further increase in gross margin levels for merchant operations and value-added services, the net profit forecast for 23-25 years was raised to 11.6/15.3/1.96 billion yuan, compared to the previous forecast, +21%/+23% /+25%. The current stock price corresponds to 23-25 PE, 16x/12x/9x, respectively, maintaining the “buy” rating.

Risk warning: The rise in rates fell short of expectations, the demand for overseas payment hardware fell short of expectations, and competition intensified.