The company's performance in the first half of the year was affected by the restructuring of subsidiaries in the short term. After strengthening internal management, gross profit space was increased and cost control was good; we are optimistic that with the further release of demand for electronic medical records construction, the company's performance is expected to usher in rapid growth, and the company's AI+ medical products will further enrich and open up space.

Incident: The company released its 2024 semi-annual report. The first half of the year achieved operating income of 0.3 billion yuan, YoY +2.92%; realized net profit due to mother -0.027 billion yuan, compared to -0.023 billion yuan in the same period last year; realized net profit without return to mother of -0.031 billion yuan, compared to -0.028 billion yuan in the same period last year; achieved net operating cash flow of -0.19 billion yuan, compared to -0.196 billion yuan in the same period last year. The company's profit loss increased slightly year-on-year in the first half of the year. The main reason was that the holding and participating subsidiaries invested by the company were in the business start-up period or recovery period from bankruptcy and restructuring, and there were losses in the short term. In the 24Q2 quarter, the company achieved operating income of 0.178 billion yuan, YoY -3.54%; realized net profit attributable to mother of -0.016 billion yuan, compared to -0.001 billion yuan in the same period last year; realized net profit deducted from mother -0.018 billion yuan, compared to -0.004 billion yuan in the same period last year.

The margin for gross profit has been further increased, and costs are well controlled. In the first half of the year, the company achieved a gross profit margin of 48.03%, +2.51pct; Q2 achieved a gross profit margin of 48.64%, +2.79pct year over year, further improving gross profit space. We believe that the main reason was the increased maturity of the company's new products and improved implementation delivery management. In terms of cost ratios, the company's sales/management/R&D expenses changed year-on-year in the first half of the year by -1.18/-1.58/-7.18pct, respectively. Expenses were well controlled, and the three fees were continuously optimized. We believe that the main reason was that the company paid more attention to management improvement and cost control, focusing on internal control management and personnel energy efficiency improvement.

Demand for electronic medical records and connectivity continues to be released, and smart clinical products are further enriched. According to IDC data quoted on the company's official account, in 2023, Jiahe Meikang's market share was 15.3%, winning the crown for 10 consecutive years; among the hospitals served by the company, more than 30 hospitals obtained electronic medical records level 5 or above certification, and more than 60 hospitals were certified 4 A or above in the standardized maturity assessment of information interconnection. Short-term performance is affected by the pace and budget of the hospital recruitment business, but in the medium to long term, hospitals are highly motivated to build electronic medical records and connectivity. We are optimistic that the company's performance will usher in rapid growth as demand for electronic medical records construction is further released. In terms of AI+ medicine, the company continues to enrich smart clinical products. For example, the company launched a clinical medical “AI assistant” product. The model has been implemented and verified at Peking Union Medical College Hospital and Beijing Medical Hospital, and successfully assisted hospitals to pass level 6 and level 7 electronic medical record reviews respectively; in addition, the company plans to deeply integrate Ande Medical Intelligence's image-assisted diagnostic products and ultrasound-assisted diagnostic product modules into the emergency diagnosis process.

Downgraded to “Overweight” investment rating. We continue to be optimistic about the release of construction needs related to electronic medical records, and AI+ medical products will further enrich the opening space. Net profit due to mother for 24-26 is estimated to be 0.098/0.134/0.177 billion yuan. Considering the pressure on the company's short-term performance, it was downgraded to an “increase in holdings” rating.

Risk warning: Industry competition intensifies, demand falls short of expectations, and policies fall short of expectations.