The company's 1Q24 profit performance fell short of our expectations
Hang Seng Electronics announced 1Q24 results: 1Q24 revenue of 1.188 billion yuan, +5.13% year over year; net profit attributable to mother of -0.36 billion yuan, turning loss year on year; net profit after deducting non-return to mother of 121 million yuan, -71.28% year on year. The profit fell short of our expectations.
Development trends
Demand is under pressure in the short term, and the two major business categories of operations and insurance have become important drivers of revenue as scheduled. 1) Revenue side: 1Q24's revenue was 1,188 billion yuan, +5.13% year over year. By business, operating and institutional technology revenue was 234 million yuan, +20.07% year-on-year; corporate finance, insurance core and financial infrastructure technology revenue was 103 million yuan, +31.92% over the same period. Summit's domestically adapted banks, or takeover, became an important driving force. Fortune Technology revenue/asset management technology revenue/risk and platform technology/data services/innovation business revenue was 2.24/2.83/0.99/0.80/118 million yuan, respectively, -20.34%/+13.64%/-7.84%/+5.20%/+0.51%. 2) Order and cash flow side: Cash flow received from 1Q24 sales of goods and services was 818 million yuan, -7.04% year over year; contract debt was 2,491 billion yuan, -9.83% year over year.
The profit side is under pressure, partly driven by profit and loss from changes in fair value and falling profits of joint ventures. The gross margin of the 1Q24 company remained flat at 68.8%; the net profit margin was -2.96%, -22.75ppt; the net profit margin to mother was -3.04%, the year-on-year net profit and loss decreased by 231 million yuan compared to 1Q23, which mainly affected non-recurring profit and loss items; deducted non-net interest rate of 1.81%, -4.81ppt, mainly due to the large decrease in profits of the associated enterprises invested by the company, which brought about -66 million yuan year-on-year in the investment income.
Driven by demand during the year, or large-scale promotion of domestic adaptation of operating business+bank summit, focus on the overall financial IT demand situation in the second half of the year. During the reporting period, Hang Seng's five core system solutions were selected as the “Third Financial Credit Innovation Excellent Solution”, covering key business areas such as brokerage, asset management, wealth management and institutional services, with the aim of accelerating the digital transformation and independent innovation of financial institutions. In April 2024, Summit, a subsidiary of Hang Seng's subsidiary Yunying Network, made a breakthrough in domestic replacement adaptation of databases and operating systems, becoming the first solution to pass the evaluation of the Ministry of Industry and Information Technology. Furthermore, the company consolidated core strategic customer partnerships and joined hands with Huawei to release TA integrated joint solutions to enable financial institutions to improve core system performance and technical autonomy.
Profit forecasting and valuation
We kept our 2024/2025 profit forecast basically unchanged, and maintained the industry rating. Considering the decline in the industry valuation center, we lowered our target price by 9.4% to 29 yuan, corresponding to 27x/23x 2024e/2024eP/OCF. We have 30% upside compared to the current stock price, and are currently trading at 17x 2024eP/OCF.
risks
Market competition intensified, AI layout fell short of expectations, and domestic replacement progress fell short of expectations.