Incident Overview

The company recently released its 2024 semi-annual report. The first half of the year achieved revenue of 0.873 billion yuan, a year-on-year decrease of 13.07%, and achieved revenue of 0.451 billion yuan in Q2, a year-on-year decrease of 15.82%. Net profit to mother was 0.206 billion yuan in the first half of the year, up 2.98% year on year, and net profit to mother was 0.116 billion yuan in single Q2, up 3.63% year on year. Overall, demand in the cybersecurity industry is still under pressure, and we still have to wait for the inflection point. Judging from the revenue structure, businesses such as cloud security, cloud computing, and Xinchuang are growing rapidly and are expected to bring new support.

Cloud security, cloud computing, and Xinchuang businesses supported growth. On the revenue side of improving operating quality, the company achieved a 13.07% year-on-year decline in revenue in the first half of 2024, and the industry as a whole is still under pressure. However, judging from the revenue structure, in terms of new business directions, cloud security revenue increased 51.52% year on year, cloud computing revenue increased 35.80% year on year, and Xinchuang security revenue increased 22.99% year on year. In terms of industry segments, revenue from the health industry increased 46.45% year on year, revenue from the energy industry increased 33.42% year on year, revenue from the political and legal industry increased 31.13% year on year, and revenue from the transportation industry increased 15.63% year on year. As a result, the company's cloud security, cloud computing, and Xinchuang businesses, as well as the needs of related industries, form a certain amount of support.

On the profit side, the company's comprehensive gross profit margin for the first half of 2024 was 63.30%, an increase of 7.86pct over the previous year. The company's total expenses decreased by 2.63% year on year during the first half of the year. As the company's early layout of new directions and technology was basically completed, R&D expenses decreased by 5.80% year on year; management expenses decreased by 30.64% year on year; the company continued to invest in marketing, and sales expenses increased 9.71% year on year. The increase in the company's gross margin and the decrease in period expenses indicate that the quality of the company's operations has improved.

Xinchuang, cloud computing, AI, and the Internet of Vehicles are making multiple efforts

In terms of Xinchuang Security, according to the company's semi-annual report, the company has released 69 models of 265 models of “Tianrongxin Kunlun” series products based on domestic software and hardware, and has obtained more than 2,300 compatibility certifications, and has always maintained its leading edge in the industry with the most complete range and models of Xinchuang products. In terms of technology and ecological integration, through close cooperation with domestic CPUs, operating systems, databases, browsers, middleware, etc., basic software and hardware, national secret algorithms, and trusted computing technology are deeply integrated to enhance the core competitiveness of Xinchuang products and solutions.

In terms of cloud computing, the company released new products such as Tianwen Intelligent Computing Cloud Platform, server virtualization, computing power servers, and next-generation cloud terminals, and updated the new version of Tianrong XinTaihang Cloud, adding capabilities such as one-click database deployment and management of public cloud resources such as Alibaba Cloud, Huawei Cloud, and Tianyi Cloud to further enhance product ease of use and stability; improve the ease of use and stability of the product; improve Xinchuang hyperconverged solutions, disaster recovery construction solutions, financial industry desktop cloud solutions, VMware migration alternative solutions, etc., to meet customer needs in different scenarios.

In terms of AI security, in 2024, the company actively explored the deep integration and innovation of “AI+ security”. Based on AI technology applications such as big models, small models, natural language processing, machine learning, and deep learning, the company released a series of products such as the Tianwen Big Model System, the product Xiaotian, and the Tianwen Intelligent Computing Cloud Platform, which are mainly used in scenarios such as threat detection, safe operation, knowledge quiz, and computing power management to achieve full AI empowerment.

In terms of vehicle networking security, the company continues to accelerate the integration of safety technology and connected vehicle business scenarios, built an elastic adaptive vehicle network security system covering vehicle-side, communication, cloud, V2X and data security, and has carried out in-depth cooperation with leading enterprises, research institutes and regulators in the industry such as BAIC, GAC, Dongfeng, Geely, Shanghai Changxing, Beili Xishan Laboratory, Nanjing Zijinshan Laboratory, Beijing Quality Inspection Institute, and the Three Public Security Institutes to jointly promote the application of intelligent connected vehicles in various types of scenarios.

Investment advice:

As a leading comprehensive network security solution provider in China, while maintaining a strong competitive advantage in the firewall market, Tianrongxin is driving steady growth in basic security products through localization requirements, while laying out multiple new business tracks such as cloud computing, data security, and AI, which is expected to open up future growth space. We expect the company to achieve operating income of 3.588/4.117/4.722 billion yuan and net profit to mother of 0.245/0.396/0.498 billion yuan in 2024/25/26. Maintaining a buy-A investment rating, a 6-month target price of 5.20 yuan is given, which is equivalent to 25 times the dynamic price-earnings ratio of 2024.

Risk warning: downstream customer demand falls short of expectations; technology development falls short of expectations.