Data elements and big models drive growth, maintaining steady revenue growth in the “buy” rating in 2023, after deducting high non-profit growth. Considering the impact of industry fluctuations and the contraction of downstream customer expenses, we lowered our 2024-2025 and added 2026 profit forecasts. We expect net profit to be 6.04, 7.33, 884 million yuan (originally 854,1,069 million yuan), EPS 0.38, 0.46, 0.56 yuan (originally 0.54, 0.68 yuan), and the current stock price corresponding PE is 25.9, 21.3, and 17.7 times. The company is expected to benefit from the equipment renewal policy and maintain a “buy” rating.

Smart transportation revenue grew rapidly, with rising gross margin and cost and interest rate optimization driving the release of the 2023 annual report. In 2023, it achieved revenue of 7.794 billion yuan, an increase of 11.28% year on year, net profit to mother of 542 million yuan, an increase of 212.39% year on year, and net profit after deducting non-return to mother of 277 million yuan, an increase of 200.41% year on year.

(1) Smart transportation orders continue to be implemented, and revenue is growing at a high rate. Smart transportation achieved revenue of 2.58 billion yuan (excluding the contribution of subsidiary video products), a year-on-year increase of 37.6%. Among them, intercity traffic revenue was 1.62 billion yuan, an increase of 88.4% year-on-year, and urban transportation was 90 billion yuan, a year-on-year decrease of 4.3%. The company continues to expand customer resources, and large orders continue to be implemented in business areas such as highways and urban traffic management, including the 160 million yuan Lhasa smart transportation construction project and the nearly 40 million yuan smart connectivity project for the Hainan Roundabout Tourist Highway. The smart transportation business has achieved high growth. (2) The domestic business of intelligent IoT is under pressure, and overseas growth is maintained at a relatively rapid pace. Intelligent IoT achieved revenue of 5.21 billion yuan, an increase of 1.7% over the previous year. Domestic business is under pressure, but overall growth has been achieved, and the coverage rate of the district and county markets has further increased; the growth rate of overseas business continues to grow at a relatively rapid pace, and markets in key overseas regions have been sinking faster. (3) Increased gross margin and optimized expenses and interest rates drive high growth after deducting non-profit. In 2023, the company's comprehensive gross margin was 34.47%, up 5.02 percentage points from the previous year, while the gross margin of smart transportation and smart IoT increased by 7.85 and 4.70 percentage points respectively. Sales, management, and R&D expenses were 14.69%, 4.42%, and 13.16%, respectively. The year-on-year ratio was -1.53, -0.46, and -0.64 percentage points, respectively, and the operating efficiency was further improved. The increase in gross margin and the optimization of expenses and interest rates have jointly promoted the company's high growth after deducting non-profit.

The State Council issued a trillion-dollar equipment renewal and consumer goods trade-in action plan. The company is expected to continue to benefit. In March 2024, the State Council issued a trillion-dollar equipment renewal and consumer goods trade-in action plan, making it clear that the scale of investment in equipment in the transportation sector will increase by more than 25% in 2027 compared to 2023. Driven by the policy, the development of traffic informatization is expected to accelerate, and the value of traffic data elements is also expected to be further activated, and the company is expected to continue to benefit.

Risk warning: Smart transportation orders fell short of expectations; shipments of IoT products fell short of expectations.