Incidents:

The company released its 2024 semi-annual report. In the first half of 2024, it achieved operating income of 2.707 billion yuan, a year-on-year decrease of 7.72%; net profit to mother -0.592 billion yuan, a year-on-year decrease of 6.94%; net profit after deducting non-return to mother -0.654 billion yuan, a year-on-year decrease of 11.3%.

In Q2 alone, 2024Q2 achieved operating income of 1.672 billion yuan, a year-on-year decrease of 2.84%; net profit to mother was 0.103 billion yuan, up 27.1% year over year, and net profit not returned to mother after deducting -0.144 billion yuan, up 10.73% year on year.

Comment:

The revenue performance of each production line was significantly divided. Key strategic new products maintained positive growth. Looking at the business segment, 2024H1's security, cloud computing, basic network and IoT businesses achieved revenue of 1.398, 1.106, and 0.203 billion yuan respectively, compared with -7.3%, -4.4%, and -24.1%, respectively. Among them:

The overall beta of the security industry is weak. According to IDC data, the size of China's cybersecurity hardware market fell 0.9% year on year in 2023, and downstream demand was weak. The company's different security product market performance is divided: on the one hand, products such as XDR and security hosting services, which are key strategic directions, have maintained a growth trend, but overall revenue is relatively low; on the other hand, traditional Red Sea products such as next-generation firewalls and network-wide behavior management products have declined due to industry beta.

The cloud computing industry is better than the security industry. IDC expects the compound growth rate of China's IaaS spending to reach 17.4% in the next five years in 2024. Revenue from integrated, storage, and hosted cloud products in the company's cloud computing business all achieved positive growth, but the revenue from desktop cloud products, which account for a relatively high revenue share, declined, leading to a decline in overall cloud computing business revenue. However, considering the withdrawal of international desktop cloud giant Citrix from the Chinese market, we believe there is still some room for growth in the company's desktop cloud business demand in the future.

The basic network and IoT business accounts for a relatively small share of revenue. The main reason for the decline in 2024H1 revenue was slow recovery in the economic environment and increased competition.

Looking at downstream customers, 2024H1 achieved revenue of 1.376, 1.069, and 0.262 billion yuan in enterprises, government and public institutions, finance, and other three sectors, respectively, of +2.5%, -15.9%, and -18.2% compared with the same period last year. Among them, the IT construction needs of enterprise customers showed a certain degree of resilience, accounting for 51% of revenue, and the company's channel advantages and product advantages continued to be reflected in the enterprise customer market.

The fee control effect further exceeded expectations, offsetting downward pressure on gross margin. The 24Q2 single quarter profit improved the company's 24H1 gross margin by 61.34%, down 3.14 pcts from 23H1. The main reason was that the gross margin of the 24H1 cloud computing business fell 5.31 pct compared to 23H1 due to the increase in upstream raw material prices. However, the total of the company's three expenses fell 7.4% year on year in the first half of the year. Among them, expenses accounted for relatively high sales and R&D expenses decreased 10.3% and 5.3% year on year respectively, and structurally, 24Q2 expenses increased compared to 24Q1, offsetting the impact of the decline in gross margin on profit (the company's 24Q2 net profit to mother achieved a 27.1% year-on-year reduction in losses).

“AI First” innovation research strategy continues to advance

Safety GPT: Since the company iterated on the Safety GPT 3.0 version in January 2024, as of May 2024, more than 130 users have completed the test application and delivery of convinced Safety GPT in a real environment, reducing the closed loop of the entire safety incident process from 3 hours to 5-10 minutes, and greatly improving efficiency.

AI computing power platform AICP: In May 2024, the company fully opened and tested a one-stop large model development and inference service platform for large model applications. It supports mainstream open source big models, provides capabilities such as heterogeneous computing power management and scheduling, model and data management, model training and reasoning process management, model compression and security optimization, etc., and lowers the user's threshold for large model development and application.

Distributed Storage EDS: The 502 high-performance version was released in January 2024. It targets unstructured data production scenarios in high-precision fields, empowers AI model and application development, and achieved good growth in the first half of the year.

Profit forecasting

Considering the decline in revenue due to weak downstream demand for some of the company's products in the first half of the year, we adjusted our previous profit forecast. The company's revenue for 2024-2026 is 7.681, 8.079, and 8.767 billion yuan, respectively, and net profit to mother is 0.246, 0.283, and 0.402 billion yuan, respectively. At the same time, considering that the company's important strategic product line has maintained a growth trend and its share of revenue will continue to increase in the future, the results of the superimposed company's layout in the AI field are expected to be reflected in the long term. We are optimistic about the company's outlook for a long time and maintain a “buy” rating.

Risk warning:

The company's secure GPT R&D implementation fell short of expectations; downstream customer budget recovery fell short of expectations; the company's new business expansion fell short of expectations; gross margin continued to fluctuate due to the impact of the upstream supply chain; and market competition intensified.