Matters:

The company announced its 2024 semi-annual report. The first half of 2024 achieved total operating income of 2.958 billion yuan, a year-on-year decrease of 3.61%, and realized net profit to mother of 0.192 billion yuan, a year-on-year decrease of 22.70%.

Ping An's point of view:

The company's net profit to mother increased year-on-year in the second quarter. The company achieved total revenue of 2.958 billion yuan in the first half of 2024, a slight decrease of 3.61% over the previous year. On a quarterly basis, the company achieved revenue of 1.3 billion yuan and 1.659 billion yuan in the first and second quarters, respectively, down 0.93% and 5.61% year-on-year, respectively. The company achieved net profit of 0.192 billion yuan in the first half of 2024, a year-on-year decrease of 22.70%. On a quarterly basis, the company achieved net profit of 6.0781 million yuan and 0.186 billion yuan in the first and second quarters, respectively, with year-on-year increases of -94.92% and 44.66%, respectively. The company's net profit for the second quarter increased rapidly year-on-year, mainly because in the first quarter, the company made adjustments to part of the business, and the related expenses incurred were included in the first quarter's management expenses at one time. In the second quarter, the effects of the company's business adjustments and cost control gradually became apparent. We judge that in the second half of the year, as the company continues to strictly control costs and expenses, the company's net profit performance will improve further compared to the first half of the year.

The company's gross margin and period expense ratio increased year-on-year, and R&D investment continued to be at a high level. The company's gross margin in 2024 was 86.78%, a slight increase of 1.17 percentage points over the previous year. The company's expense ratio for the 2024 period was 75.72%, a slight increase of 0.29 percentage points over the previous year. Among them, the sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio changed by -3.03 percentage points, 3.39 percentage points, -0.29 percentage points, and 0.22 percentage points year-on-year, respectively. In the first half of 2024, the company continued to invest in R&D to consolidate core technical barriers. The R&D investment amount was 0.84 billion yuan, and R&D investment accounted for 28.59% of revenue. The company's R&D investment continues to be at a high level, which will lay a solid foundation for the company's long-term sustainable development.

The company's digital cost business performed steadily. The company's digital cost business mainly provides software products and data services for all participants in construction project management, including traditional cost and job tools, as well as products and services such as new digital costs and new digital consulting. The company's digital cost business achieved revenue of 2.459 billion yuan in the first half of 2024, an increase of 4.23% over the previous year. On a quarterly basis, the company's digital cost business achieved revenue of 1.104 billion yuan and 1.355 billion yuan respectively in the first and second quarters, with year-on-year increases of 4.46% and 4.07%, respectively. The gross margin of the company's digital cost business in 2024 was 94.63%, an increase of 0.10 percentage points over the previous year. In the first half of 2024, the company's digital cost business revenue accounted for 83.12% of the company's total revenue, and gross profit accounted for 90.64% of the company's overall gross profit. As the company's basic market business, the digital cost business performed steadily in the first half of the year. In the first half of 2024, the renewal rate and application rate of the company's cost products increased compared to the same period last year, and customer stickiness continued to increase; digital new cost products focused on enterprise cost control requirements, breakthroughs were made in major customer cooperation, product application rates continued to increase, value was continuously consolidated, and the effect of improving quality and efficiency was remarkable. Among them, the AI version of cost estimation was 7 times more efficient than manual, material library and index library construction were more than 1 times more efficient, and data review improved by more than 1 times. We believe that in the future, the product value of the company's digital cost business will continue to increase.

Laying out AI and empowering AI will bring new impetus to the company's future development. At the China Digital Construction Conference (2024), the company unveiled AeCGPT, a major AI model for the construction industry, showing the broad application prospects of AI in the construction industry. aECGPT is developed based on a native application development platform, with 32 billion parameters and increased knowledge of the 100 million Tokens industry. aECGPT targets industry-level applications, covering 20 segments of expertise in 7 fields, including planning, design, transaction, cost, construction, operation and maintenance, and comprehensive management in the construction industry, and has professional capabilities such as automation, analytical decision-making, and assisted generation. The company creates a one-stop development platform for AI applications, implements full-process tools and MaaS (model as a service) service model for AI application development, and provides AI model services for various industries for the AI transformation of software products in the construction industry. Based on the industry AI platform and large model, the company integrated industry AI technology with Guanglianda's design, transaction, and construction lifecycle software products to create AI applications for various scenarios such as infrastructure calculation, material management, and engineering construction clean-up and evaluation. We believe that the promotion and application of large models in digital construction scenarios will bring new impetus to the company's future development.

Profit forecast and investment suggestions: According to the company's 2024 semi-annual report, we adjusted the performance forecast. The company's net profit for 2024-2026 is 0.529 billion yuan (previous value was 0.491 billion yuan), 0.726 billion yuan (previous value was 0.673 billion yuan), 0.925 billion yuan (previous value was 0.881 billion yuan), and EPS was 0.32 yuan, 0.44 yuan and 0.56 yuan, respectively, corresponding to August 23 PE was about 30.2, 22.0, and 17.3 times the closing price, respectively. In the second quarter of 2024, as the company's business adjustments and cost control effects gradually became apparent, the company's net profit to mother increased rapidly over the same period last year. We judge that in the second half of the year, as the company continues to strictly control costs and expenses, the company's net profit performance will improve further compared to the first half of the year. As the company's basic market business, the company's digital cost business performed steadily in the first half of the year. In addition, the company deployed AI and released aECGPT, an AI big model for the construction industry. The promotion and application of the big model in digital construction scenarios will bring new impetus to the company's future development. We are optimistic about the company's long-term growth and maintain a “Highly Recommended” rating for the company.

Risk warning: (1) Digital new cost business development falls short of expectations. The company officially launched a new digital cost solution in March 2022, transforming and upgrading from job-side products and tools for the cost field to an enterprise-level overall solution in the field of project cost control. If user acceptance of digital new cost products falls short of expectations, there is a risk that the company's digital new cost business will fall short of expectations. (2) The development of the digital construction business fell short of expectations. The company's BIM products are in a leading position in the market, but if the company cannot continue to maintain leadership in BIM products and technology in the future, there is a risk that the company's digital construction business will fall short of expectations. (3) The results of AI-enabled businesses fall short of expectations. In the first half of 2024, the company released aeCGPT, an AI model for the construction industry, and created AI applications for various scenarios such as infrastructure calculation, material management, and project construction bid evaluation. However, if the promotion progress of the big model in the digital construction scenario falls short of expectations, there is a risk that the results of the company's AI enabling business will fall short of expectations.