Event: The company released the 2023 semi-annual performance report, which is close to the upper limit of the performance forecast. 23H1 achieved revenue of 3.84 billion yuan, an increase of 5.0% year on year; realized net profit of 560 million yuan, an increase of 139.1% year on year; achieved net profit of 600 million yuan after deducting non-return net profit of 600 million yuan, an increase of 94.5% year on year. Looking at Q2 alone, we achieved revenue of 1.94 billion yuan, an increase of 4.0% year on year; realized net profit of 270 million yuan, an increase of 74.2% year on year; net profit of non-attributable income of 350 million yuan was achieved, an increase of 175.5% year on year.

The scale of 23H1 transaction flow is growing rapidly, and hardware going overseas has become the second growth curve. 2023H1 Company's merchant operations and value-added services/electronic payment products and information reading products/industry application and software development services achieved revenue of 18.1/15.3/49 billion yuan, respectively, +24.4%/-7.7%/-7.7%, respectively. By business:

1) Value-added services for merchant operations: In the first half of the year, the company's payment service transaction scale was 1.3 trillion dollars, an increase of 17.7% over the previous year; at the same time, the merchant structure was continuously optimized, and the proportion of merchants with monthly turnover of 100,000 or more continued to grow, an increase of 9.7 pp over the end of last year. 2) Electronic payment and information reading products: Domestic demand for payment terminals has not recovered in the first half of the year, but various smart POS models launched by the company were successfully shortlisted by state-owned banks such as ICBC, Agricultural Bank, and ICBC. Smart POS shipments increased by more than 80% year-on-year; overseas sales of pan-smart terminal products exceeded 2.1 million units, accounting for over 77% of smart terminal revenue.

The cost side is relatively stable, and profitability has increased significantly. 23H1's gross margin was 36.8%, up 10.39 pp year on year. Specifically, the gross margin of merchant operations and value-added services/electronic payment products and information reading products was 41.1%/38.3%, respectively, +10.09pp/12.34 pp. The sharp increase in gross margin was mainly due to: 1) the company's successive charges for some ordered products in the first half of the year and the reduction in agent share ratio; 2) The accelerated deployment of overseas business localization and management costs. The 23H1 sales/management/R&D expense ratio was +0.09 pp/-0.35 pp/-0.52 pp year on year, respectively, to 4.4%/5.9%/7.3%; net profit margin was 16.1%, +8.67 pp year on year, and overall profitability increased significantly.

Perception AI, face recognition, and cognitive AI have been actively deployed, and related applications have been implemented. The company uses natural “vision” genes to expand from 1D/2D bar code recognition algorithms and 3D 3D face recognition algorithms to multi-dimensional dynamic visual perception algorithms. 1) Perceiving AI. Based on rich intelligent data collection terminals, superimposed edge computing power, the company launched edge smart gateway products and special AI modules for operators such as China Tower; 2) Face recognition algorithms to expand payment scenario technology to security scenarios. Through a security level inspection standard by a public security institute, the prosthetic detection pass rate was over 95%, and the real person pass rate was 100%; 3) Cognitive AI, the company collaborated with the Institute of Automation of the Chinese Academy of Sciences, Zidongtai University Open Source Model, and Baichuan Intelligent Open Source Model to improve the accuracy rate of existing neural network models It also supports rapid training for new tasks and shortens the development cycle. At present, the company's large model application services cover operators, educational institutions and other fields.

Profit forecasts and investment recommendations. Considering that the domestic billing business continues to benefit from the recovery in turnover and the trend of industry fee increases; the penetration rate of overseas non-cash payments continues to increase, and the overseas hardware terminal business is developing rapidly. It has already become the second growth pole in the company's performance, and the company's overall profit elasticity is worth looking forward to. It is estimated that the EPS for 2023-2025 will be 1.15/1.47/1.75 yuan, and the PE corresponding to the current stock price will be 17/13/11 times, respectively. The company will be given 16 times PE in 2024, corresponding to the target price of 23.52 yuan, and maintain the “buy” rating.

Risk warning: Risks such as consumption recovery falling short of expectations, overseas expansion falling short of expectations, increased competition in the industry, fluctuations in fair value of participating subsidiaries, and falling short of expectations in the promotion of digital yuan.