Incident: The company released its semi-annual report for 2023, achieving operating income of 376 million yuan, up 20.18% year on year; net profit of 24 million yuan, up 37.06% from the same period last year; net profit of non-return net profit of 17 million yuan, up 8.66% year on year; gross margin was 34.58%, up -0.31 pct year on year. On a quarterly basis, in 2023 Q2, operating income/net profit was 287/028 million yuan, respectively, up 51.45%/1982.24% year on year; gross profit margin was 34.82%, +1.98 pct year on year.

Comment: The company's 2023H1 performance was in line with expectations, and Q2 had a big impact on H1's overall performance. The company's H1 revenue increased by 20.18% over the same period last year. The main reason was the elimination of adverse environmental factors and the continuous increase in power grid investment; at the same time, the company continued to cultivate in the power industry, the company's product plan was recognized by a wider range of customers, and its competitive position continued to be consolidated. H1's order signing amount increased by more than 60% compared to the same period last year; H1's net profit increased 37.06% year-on-year, mainly due to the increase in operating income and government subsidies during the reporting period. The proportion of total expenses for the period fell compared to the same period last year. On a quarterly basis, Q2 net profit was significantly driven by the first half of the year, with a year-on-year increase of 1982.24%, mainly due to last year's low base.

The company continues to control fees, and R&D expenses are on the rise. In 2023, H1's sales expenses/management expenses/financial expenses were 0.36/0.25/00.5 billion yuan, respectively, up 12.92% /8.95%/-72.78%, respectively. The sales expense rate/management expense rate/financial expense ratio were 9.46%/6.75% /- 0.12%, respectively. The cost rate for the period was 16.09%, a year-on-year decrease of 1.33pct. Furthermore, R&D investment was 47 million yuan, an increase of 27.34% over the previous year, accounting for 12.38% of revenue. The company continues to pay attention to the evolution of cutting-edge technology in the industry. The company's algorithms and models continue to be optimized and updated, and applied to front-end devices one after another. The overall recognition rate has increased significantly.

The power transmission sector is the largest main business, and the water conservancy and rail transit business are still waiting to expand. The company's main business is smart grid, smart water conservancy and smart rail transit. 2023H1's intelligent transmission line operation and maintenance solution achieved revenue of 309 million yuan, accounting for 82.18% of the company's total revenue. Currently, the company has shipped nearly 400,000 front-end smart terminals (including unconfirmed revenue), and is in a leading position in the country in terms of market share, device online rate, and customer satisfaction. In the field of water conservancy, the company's related solutions have been implemented in many cities. In terms of rail transit, China Railway Group's “Line Patrol Production Management System” project, which the company participated in this year, is in the pilot application stage, and the implementation and application of artificial intelligence technology in the railway industry is gradually being promoted.

Profit forecast: Taking into account seasonal factors in the power grid industry, etc., the company's performance in the first half of the year is in line with expectations, and the future awaits the expansion of the water conservancy and rail transit business. We predict that the company will achieve net profit of 0.76, 1.16, and 161 million yuan from 2023 to 2025, which will increase by 170.9%, 52.31%, and 39.31% respectively from 2023-2025, and maintain the “buy” rating.

Risk warning: Industry development, company business progress, profit forecasts and valuations fell short of expectations.