Event: The company released its 2023 three-quarter report. The first three quarters achieved operating income of 563 million yuan, +21.5%; net profit of 33 million yuan, +28.52% of the previous year; net profit after deducting net profit of 225 million yuan, +9.59% year-on-year; and gross margin of 34.4%, +0.66pct year-on-year. On a quarterly basis, the operating income/net profit realized in Q3 of 2023 was 186/10 million yuan, +24.26% and +11.36%, respectively; the gross profit margin was 34.04%, +2.69pct year-on-year. Sales expenses/management expenses/R&D expenses for the first three quarters were 0.54/0.39/72 million yuan respectively, +10.62%/+15.37%/+32.1% year-on-year.

Comment: With “artificial intelligence+industry” as its strategic direction, the company first entered the field of artificial intelligence in 2017. Its main business covers smart electricity, smart water resources, and smart rail transit. The company signed a cooperation agreement with Huawei and officially joined the Shengteng Wanli Partner Program. The two sides will carry out all-round cooperation in various fields such as electricity and water resources to jointly prosper and prosper the AI ecosystem.

Take advantage of AI to develop smart grid business. China's smart grid market increased from 476.1 billion yuan in 2017 to 854.6 billion yuan in 2021. The smart grid market size will reach 107.72 billion yuan in 2023, and the CAGR will reach 14.58% from 2017 to 2023. The transmission business is the company's largest main business. In 2023, H1's transmission line intelligent operation and maintenance solutions achieved revenue of 309 million yuan, accounting for 82.18% of the company's total revenue. In the future, the company will use the first-mover advantage of “AI+electricity” to further strengthen its market position in the power transmission field.

The company promoted the digital upgrading of water resources in Binzhou, and the results were promoted by the Ministry of Water Resources. In terms of flood and drought disaster prevention, Zhiyang innovatively supported the development of a digital twin, developed and completed a “four prevention” platform for flood prevention. The main urban area built a 170 square kilometer digital twin scenario and a 40 square kilometer urban flooding model, achieving accurate advanced forecasting, rapid and direct warning, forward-looking scientific forecasting, and detailed implementation plans. In terms of river and lake management, the company has set up 5 automated drone airports and planned 35 smart inspection routes to achieve round-the-clock automated duty operations for rivers in the main urban area. Relying on the digital twin platform, the company has formed a digital and three-dimensional management model for rivers and lakes of “drone+river manager+digital platform”.

Profit forecast: The company uses the smart grid business as the basic market to create a new growth pole for smart water conservancy and smart rail transit. We predict that the company will achieve net profit of 0.76, 1.16, and 161 million yuan from 2023 to 2025, with increases of 170.9%, 52.31%, and 39.31% respectively from 2023-2025, maintaining the “buy” rating.

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