Event: From January to November 2023, the country's water conservancy construction completed an investment of 1093.8 billion yuan, +8.5% over the same period last year. Among them, other projects such as hydrological infrastructure and smart water conservancy have completed an investment of 93.1 billion yuan. The prosperity of the industry continues to rise.

Comment: The prosperity of the water conservancy information technology industry continues to rise, and the company's second growth curve is growing strongly. In 2022, China invested 1089.3 billion yuan in water conservancy construction, an increase of 44% over the previous year, of which the investment in information technology was about 15.3 billion yuan, accounting for 1.4%. Driven by relevant policies and projects, it is expected to increase to 2.2% in 2025, and the market space will exceed 20 billion yuan. The company has already achieved a market share of about 50% in the transmission inspection industry. Using past experience, the company has developed a digital twin smart water conservancy four-pre system product system with “four intervention” functions with forecasting, early warning, preview and planning functions, covering the “2+N” intelligent water conservancy business application system, and realizing the deep integration of next-generation information technology such as artificial intelligence, digital twins, and drones with water conservancy services. The Mengshan Reservoir project in which the company participated was recognized as a standardized management project of the Ministry of Water Resources, and the Shandong Binzhou Urban Flood Control River and Lake Management Digital Twin Platform received a briefing issued by the Ministry of Water Resources for key promotion throughout the country. Under the high growth of the industry and the company's strong expansion, the water conservancy informatization business is expected to show explosive growth in the next few years, providing the company with a strong second growth curve.

Multiple modes open up a new space for AI, and the company's application scenarios are very clear. The company has now begun to deploy the application of multi-modal capabilities in the power and water conservancy industries, including directly sending images to customers after the previous warning has occurred to allow customer judgment to evolve into directly providing customers with text-based warning and suggested solutions, greatly improving user experience and processing efficiency.

Huawei is a core partner in Shengteng's industry, with comprehensive cooperation in electricity+water+rail transit. As early as 2019, the company collaborated with Huawei to launch a joint solution for AI applications in power scenarios. It is one of the first partners to strongly support Huawei's Shengteng computing industry. It has deep industry experience and technology accumulation in the fields of power grids, new energy power generation, water conservancy, rail transit, etc., and has jointly defined and published a number of influential artificial intelligence solutions, which have won high recognition from customers. At present, the HUAWEI Pangu model has been implemented in several provincial power grid companies, and the company is tied to the rapid expansion of Huawei based on its leading cooperation advantages.

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. The current stock price corresponding to 2024 PE is only 26X, which is significantly underestimated, giving it a “buy” rating.

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