Incident: 1) The company announced its 2024 mid-year report. 2024H1 achieved revenue of 4.252 billion yuan, a year-on-year increase of 16.78%; realized net profit to mother of 0.517 billion yuan, an increase of 1.16% year-on-year. Excluding GDR exchange gains and losses, net profit to mother was 0.519 billion yuan, an increase of 49.80% year-on-year. 2024Q2 achieved revenue of 2.514 billion yuan, a year-on-year increase of 14.49% and a month-on-month increase of 44.59%; realized net profit to mother of 0.371 billion yuan, a year-on-year decrease of 11.26% and a year-on-year increase of 155.25%. 2) The company issued a draft equity incentive plan.

The company's 24H1 control system business remains steady, and instrumentation growth is high. By business, 2024H1 control system (control system and control system+instrument) revenue was 1.725 billion yuan, up 17.65% year on year; industrial software (industrial software and control system+software+other) revenue was 1.11 billion yuan, up 3.23% year on year; instrument revenue was 0.353 billion yuan, up 72.18% year on year. From an industry perspective, the revenue of the petrochemical and chemical industries continued to grow steadily. The revenue of the oil and gas, pharmaceutical, food and beverage industries continued to maintain a rapid growth trend. The petrochemical industry grew 26.95%, the chemical industry grew 26.03%, the oil and gas industry grew 117.32%, and the pharmaceutical and food industry grew 29.23%.

The company's gross margin improved month-on-month, and net profit margin declined. 1) 2024H1 gross profit margin was 33.23%, up 0.76pp year on year; net profit margin was 12.32%, down 1.96pp year on year. 2024Q2 gross profit margin was 34.76%, up 2.84pp year on year; net profit margin was 15.10%, down 4.20pp year on year. 2) The expense ratio for the 2024 H1 period was 21.43%, up 0.96pp year on year. Among them, sales/management/R&D/finance expense ratios were -1.20/-1.12/-0.72/+3.99pp, respectively. The increase in financial expense ratio was mainly due to a year-on-year decrease in exchange earnings.

The company has made major breakthroughs in automated control and industrial AI. In June 2024, the company released two products: 1) Universal Control System UCS. A software-defined, fully digital, cloud-native control system has been built, completely disrupting the traditional DCS technology architecture used for nearly 50 years, and breaking the shackles of traditional physical controllers, I/O modules, and cabinet groups. Based on the new general control system architecture, the company launched the first general control system UCS product-nyX. 2) The process industry's first large AI timing model TPT. At present, TPT has achieved breakthrough applications in chlor-alkali, thermoelectric, and petrochemical devices. Compared with traditional control, TPT can achieve a system automatic control rate of more than 95%, a 5% reduction in nitrogen oxide content, and a reduction in energy consumption of more than 3.1% per ton of steam coal.

Draft equity incentive plans were issued for the UCS and TPT teams. The number of restricted shares to be awarded by the company is 2.945 million shares, accounting for 0.37% of the total share capital. The incentive plan targets the UCS and TPT teams, involving a total of 63 people, including senior management, core technical personnel, and other personnel. Using 2023 as the target value for performance evaluation, the net profit growth rates for 2024, 2025, and 2026 (excluding the effects of exchange gains and loss and share payment fees) will not be less than 20%, 40%, and 60%, respectively.

Profit forecasting and investment advice. Net profit due to mother is expected to be 1.36, 1.747, and 2.227 billion yuan respectively in 2024-2026, corresponding EPS of 1.72, 2.21, and 2.82 yuan, respectively. Corresponding to the current share price PE is 21, 17, and 13 times, respectively. Net profit to mother will maintain a compound growth rate of 26% over the next three years, maintaining a “buy” rating.

Risk warning: the risk of fluctuating demand in the terminal market, the risk of technological upgrades and iterations of product updates, and the risk of increased market competition.