Equity incentives and exchange gains and losses affect profits in the short term, and overseas and innovative businesses performed well. The company released its 2024 semi-annual report. With 2024H1, the company achieved total operating income of 41.209 billion yuan, a year-on-year increase of 9.68%; realized net profit of 5.064 billion yuan, a year-on-year decrease of 5.13%; and realized net profit without deduction of 5.243 billion yuan, an increase of 4.11% year-on-year. 2024H1 has a special fee. The company cancelled the 2021 equity incentive in 24Q2. All unamortized equity incentive expenses will be included in the one-time fee. The amount of this fee is 0.471 billion yuan. According to the affiliation of the motivated employee, it is included in 24Q2 sales, management, and R&D expenses, and marked as non-recurring profit and loss. Furthermore, 24H1 exchange loss was about 81 million yuan, and 23H1 exchange gain was about 0.285 billion yuan. Excluding the effects of equity incentive fees and exchange gains and losses, according to a comparable scale, 24H1 profit increased by about 10% year-on-year. In terms of the main domestic business, the total revenue of the three BGs in 2024H1 was 18.971 billion yuan, a year-on-year decrease of 0.26%, accounting for 46% of the company's revenue. Among them, the public service business group PBG achieved revenue of 5.693 billion yuan, a year-on-year decrease of 9.25%; the enterprise business group EBG achieved revenue of 7.489 billion yuan, an increase of 7.05% year on year; and SMBG of the SME business group achieved revenue of 5.789 billion yuan, an increase of 0.64% year on year. In terms of overseas main business, 2024H1 achieved revenue of 11.441 billion yuan, an increase of 15.46% over the previous year. Revenue from the main overseas business accounts for about 28% of the company's business (the main overseas business does not include overseas revenue from innovative businesses; if overseas revenue from innovative businesses is included, overseas revenue accounts for 34.41%). The innovative business 2024H1 achieved revenue of 10.328 billion yuan, a year-on-year increase of 26.13%, accounting for 25% of the company's business. Major innovative businesses have taken the lead in the market in their respective vertical industries. Innovative businesses have formed effective technical collaboration and business collaboration with the company's main business, which has become a support for driving the company's business growth, and will form joint efforts in developing digital business scenarios in the future.

EBG is growing steadily, PBG's revenue structure is constantly being adjusted, and SMBG aims to create channel advantages. Looking at BG, the PBG business, on the one hand, is constrained by the financial situation of local governments. The public security and traffic police industries continue to decline, and the predictability of demand implementation has become longer and the predictability of demand implementation has deteriorated; on the other hand, businesses such as water conservancy, disaster prevention and relief, and emergency management are supported by treasury bonds, which has boosted the PBG government industry's performance.

Due to various divisions in the industry, the public security industry's share of overall revenue declined further, and the share of revenue from transportation business represented by traffic management optimization and government business revenue represented by water conservancy emergency and environmental protection municipalities continued to rise. The adjustment of the revenue structure helped PBG's business to recover steadily. Demand for improving the quality, efficiency, and cost reduction of public services is becoming a new driving force for PBG. The company will continue to promote business transformation and integrate traditional security with the new needs of social governance. The EBG business mainly consists of a large number of industries that mainly rely on their own capital to develop, and these industries continue to maintain a certain level of investment. The EBG business currently consists of 9 industries. Apart from the decline in smart buildings, the eight sub-industries of industrial enterprises, petrochemical coal, education and teaching, electricity, finance, commerce, steel, non-ferrous metals, and culture, sports and health have all continued to grow. Although overall investment in EBG's various industries has slowed, there is still an urgent need for enterprises to improve quality, increase efficiency and reduce costs. The company continues to promote the implementation of digital business scenarios, continuously deepens its understanding of the needs of industry users, develops more cost-effective special products that solve user pain points, and work with users to meet the challenges brought about by economic fluctuations. In the SMBG business, the company continues to build online and offline channel advantages, continuously expand and enrich channel product categories, and continue to promote the company's products through uniting channel partners and using social media.

All lines of innovative business are growing steadily, and the company supports the development of innovative businesses overseas. Among innovative businesses, 1) the growth rate of the automotive electronics business is relatively rapid, including the influence of merger with Senstec, as well as the domestic passenger car market's own growth and overseas influence; 2) the robot business's machine vision and AGV business performed well in domestic and foreign markets, especially the AGV business; 3) in the smart home business, the growth rate of overseas business is higher than that of the domestic business; 4) the thermal imaging business has also performed well at home and abroad. The investment in domestic trillion treasury bonds in emergency management has brought about the demand for thermal imaging, driving the revenue growth rate of Haikang Weiying; 5) the storage business is receiving revenue growth from Haikang Microfilm; 5) The impact of price increases since the second half of 2023 is quite obvious, driving revenue and profits; 6) Other innovative businesses include Hikvision, Hikon Huiying, and Haikang Fire. Among them, Hikang Ruiying had businesses related to smart security gates in test centers in 2023, which brought good revenue growth. There was no such revenue in 2024, leading to a decline in business scale. This is also the main reason for the negative revenue growth of other innovative businesses. However, from the perspective of innovative business development overseas, innovative business products are still quite competitive globally. For example, Hikvision probably accounts for more than 50% of overseas revenue. Fluorite Network's DIY products benefit from high labor costs in Western countries and are also quite popular overseas. Hikang Robotics' AGV and other businesses have also performed well in overseas markets.

The company's highly granular innovative business, such as the robotics business, has its own marketing team overseas. The company generally supports the expansion of innovative businesses overseas. We believe that the performance of all lines of the company's innovative business is relatively stable, and they all have leading competitiveness. In the future, with the continuous promotion of innovative business overseas development, the company's innovative business is expected to achieve better results.

The company pays great attention to the digitization of scenarios, and business development is in full swing. The company EBG has now been split into 9 industries, and may continue to be segmented in the future, and scene digitization is integrated into EBG's business. The creation of digital products and solutions is first continuously refined and summarized in the process of industry promotion, mature products and technologies are settled, further promoted, and then continuously iterated from user feedback. Users will also put forward more and more demands from the company as the business progresses. A large amount of demand needs to be discovered little by little in the process of cooperation with users. The digitization of user business scenarios does not happen overnight, and the company's products also follow the rich demand step by step. This takes a long time to slowly accumulate and fulfill. The company clearly sees the future of the business of digitizing the scene. Although the current economic environment is not that ideal, which affects users' enthusiasm in terms of capital expenditure, the company is now trying its best to find some pioneer users and leading customers to cooperate with. On the other hand, the company's own resources are limited, so prioritize businesses that have already been clearly seen as much as possible, and other needs that cannot be addressed for the time being settled over time may become more clear over time. Therefore, the iterative process of scene digitization business will be a long journey. However, with regard to the long-term trend of digital scenarios, the company believes that the production efficiency of society determines the country's competitiveness, and that the production efficiency of the individuals behind the enterprise determines the competitiveness of the enterprise. To make an enterprise's products stand out from products of the same type, it is necessary to pay attention to product quality, efficiency, and cost control. Improving quality, reducing costs, and increasing efficiency are eternal topics of enterprise competition. Enterprises will continue to rely on technological means to enhance competitiveness. This is an industry with long-term demand and good sustainability. We believe that the company is currently paying close attention to the digitization of scenarios, and has now accumulated a certain amount of accumulation. It is expected that the development of this business will continue to advance in the future, and there will be a lot of snow.

The Guanlan model industry is being implemented, and there is plenty of room for expansion of application scenarios. In addition to the basic general model, Haikang's Guanlan model also forms many major industry models according to the needs of different industries. The company combines large models with industry applications. Whether it is the accumulation of data volume or the effect of the application, it is quite outstanding. For example, in terms of large audio models, the company has now accumulated a large amount of audio data in various industries, and has been successfully used in scenarios such as audio signal testing and industrial equipment quality inspection. In terms of the large optical fiber model, the company has now accumulated nearly 10 million pieces of high-quality optical fiber data, which have been successfully applied in scenarios such as belt roller fault detection in the steel, coal, electricity and other industries. Compared with traditional algorithms, the fault diagnosis error rate of Haikang's industry model has been reduced by more than 70%, and it has the ability to use it right out of the box. In terms of X-ray models, the amount of data currently accumulated by the company has reached the level of 10 million, and it has been successfully applied in industrial defect detection, identification of prohibited security products, and analysis of liquid components. Judging from the application results, it has reached the advanced level of the industry. In the future, with further data accumulation, there is still plenty of room for improving the effectiveness of algorithms and expanding application scenarios. We believe that the implementation of the company's AI model is progressing smoothly. With the continuous expansion of application scenarios, the company's AI business development space is broad.

Profit forecasting and investment advice. We believe that the company's current innovative business and overseas business have become important driving forces for the company's growth, and the overall development of the two businesses is relatively steady. Along with the continuous development of the digital business in the company scenario, the future growth of the company's EBG is also worth looking forward to. We forecast that the company's revenue for 2024-2026 will be 100.029/113.256/131.362 billion yuan, net profit to mother 15.611/18.138/21.42 billion yuan, respectively, and corresponding EPS of 1.69/1.96/2.32 yuan, respectively. Referring to comparable companies, the 2024 dynamic PE was given 24-28 times, and the 6-month reasonable value range was 40.58-47.34 yuan, maintaining the “superior to the market” rating.

Risk warning. AI development falls short of expectations, industry demand falls short of expectations, and the risk of increased market competition.