The company's performance remains steady, and profits are under pressure in the short term. The company released its 2024 semi-annual report. 2024H1 achieved operating income of 14.867 billion yuan, up 1.59% year on year; net profit due to mother was 1.81 billion yuan, down 8.42% year on year. Among them, fair value changes and exchange earnings decreased by 0.295 billion yuan and 0.296 billion yuan, respectively, which greatly hampered profit performance; net profit after deducting non-return to mother was 1.762 billion yuan, an increase of 0.43% year on year. In terms of gross margin, the company's 24H1 gross margin was 41.27%. Under the general environment of increased competition, it declined slightly from month to month, but on a longer-term basis, the company's gross margin has remained stable since 2023. In the 2024 Q2 order, the company achieved operating income of 8.686 billion yuan, a year-on-year increase of 0.79%; net profit to mother of 1.249 billion yuan, a year-on-year decrease of 15.68%; net profit after deducting non-attributable net profit of 1.261 billion yuan, a year-on-year decrease of 7.06%.

G-side business has declined, and we expect policies to take effect. On the government business side, the company achieved revenue of 1.768 billion yuan in 2024H1, a year-on-year decline of 15.07%. Currently, it is quite obvious that local governments are cautious about investing and demand from traditional industries is slowing down. At the same time, driven by ultra-long-term treasury bonds and special funds, the company leverages the accumulation of products and solutions in new business segments in recent years, and continues to strengthen the monetization of business opportunities in emergency response, transportation and other industries with a flexible and agile special class mechanism to hedge against pressure on some industries. Furthermore, in terms of government business, the country has introduced and implemented policies and projects in the areas of trade-in, disaster prevention and mitigation, hundreds of stations and thousands of piles, and road collaboration, hoping to make up for the negative growth of some 2024H1 government services.

The B-side business remains steady, and the digital transformation of enterprises is the company's long-term investment direction. On the corporate business side, the company achieved revenue of 3.9 billion yuan in 2024H1, an increase of 1.11% over the previous year. Looking at specific industries, industrial and commercial enterprises are growing rapidly, the energy sector continues to develop well, and the digital value of the electricity and coal sectors is being released at an accelerated pace. Furthermore, policy disturbances continue in some industries, and there is some pressure. For example, construction, education, health, and finance industries are weak. Despite being disrupted by short-term confidence on the enterprise side, digital transformation is still the only way to help enterprises improve their competitiveness, cross the cycle, and achieve sustainable growth. The digital transformation of enterprises is one of Dahua's long-term investment directions in the future. The company will make full use of the video as the core perception system+AI capabilities to enter the enterprise OT field, gradually move from auxiliary systems to the core main production system, and intervene in the fields of enterprise production, operation, and management. Examples include personnel behavior, equipment status, environmental safety, etc. in production safety, intelligent equipment, tools and other products in production execution, measurement and analysis of production process data, and the green and low-carbon development of enterprises.

Overseas business developed smoothly, accounting for over 50% for the first time. In terms of overseas business, the company achieved revenue of 7.485 billion yuan in 2024H1, an increase of 9.08% over the previous year. Among them, major Latin American countries and the greater European region are growing rapidly. The company's overseas business market layout is broad, the product business supply is rich, and the breadth and depth are equally important. After years of development, the company's overseas revenue accounted for more than 50% for the first time, and the role of “ballast stone” was prominent. Facing the rapidly evolving international order, the company will focus on overall development and safety to ensure the healthy operation of overseas business. In the future, overseas business will continue to focus on channel decline, expand integrator customers, promote safe cities, intelligent transportation, energy, buildings, education and other industry solutions, and expand new businesses such as digital communication, fire, access control, and thermal imaging with great potential. In the future, the company will adopt “one country, one policy” to solve manufacturing and supply problems. The company will also flexibly adjust product plans according to local demands and detailed restrictions to ensure sustainable business growth in overseas regions.

The growth rate of the innovative business has not reached the ideal level, and we look forward to a rapid return to growth in the future. In terms of innovative business, the various lines of 2024H1 have stabilized and achieved overall revenue of 2.461 billion yuan, an increase of 8.95% over the previous year. The growth rate of the innovative business has not reached the desired level. Huarui Technology's business revolves around machine vision and mobile robots. 2024H1 is being carefully influenced by corporate customer investment, and its performance is under pressure. In the future, it will strengthen new product research and development, complete the product range to better help Dahua enter the customer's edge system to the core business system, provide end-to-end solutions for enterprise customers to digitally transform, reduce costs and increase efficiency, and improve operational efficiency, and achieve Dahua's business transformation in the industrial and intelligent manufacturing fields. Huaruijie's automotive electronics industry is highly competitive. Its front-end products are mainly cameras and millimeter-wave radars, but certification of vehicle specifications for new customers usually takes 1-2 years, and it still takes time and process until new models are mass-produced. 2024H2 rear products are expected to achieve rapid growth through domestic and overseas marketing platforms. The subsidiary Huagan Technology focuses on thermal imaging technology. 2024H1 has participated in several tenders in the emergency industry. It is expected that 2024H2 will launch more projects to support its performance growth. Overall, the company will continue to invest more in innovative businesses to achieve rapid growth in the future.

The China Migration Business Class Organization has been established, and 2024H2 may achieve more business implementation. 2024H1, the company set up a special class organization for the Chinese migration business, achieved a certain amount of growth, and carried out extensive preparations, including integrated business and self-built business, all of which will help 2024H2 achieve more rapid growth. In terms of terminal products, the company has completed the group warehousing of a number of new terminal products. In terms of platform cooperation, the company supports IoT companies to jointly complete the upgrade and iteration of the video networking platform. It is expected that 2024H2 will complete the Clairvoyant platform upgrade in many provinces. In terms of AI cooperation, the company supports the implementation of the algorithm tool chain of the China Mobile Zhejiang Innovation Institute as an important support tool for the brain of the China Mobile National Computing Network, empowering mobile companies in various provinces to enable them to optimize algorithms and train algorithms. In addition, the two sides have also strengthened continuous business connections, exchange and learning, and refining products and solutions. Cooperation with mobile is progressing comprehensively, and we hope to achieve deeper cooperation and more positive results in the future.

The implementation of the Xinghan model continues to advance, and it is expected to become an important driving force for performance growth in the future. Dahua's Xinghan model is an analytical multi-modal large model focusing on vertical industries. Through continuous investment and continuous deep learning in the past, the big model has been deeply applied in different industries. The Xinghan model has characteristics such as miniaturization, generalization, and improved accuracy. For example, through recognition of the behavior of stalls, it is possible to classify and label all scenes; an all-in-one machine for training and promotion of the big model has been introduced, which has achieved everything from static recognition and understanding to current video stream recognition, and has been implemented in typical industries. The graphic search and data retrieval functions provided to a customer enable them to search for corresponding description targets through natural language descriptions, breaking through the method that small models can only search targets based on fixed attributes. Furthermore, according to the database and various functions behind the platform, search and scheduling can also be implemented through language to improve data retrieval efficiency. In the electricity scenario, the company's localized all-in-one products can provide meter recognition, fireworks detection, foreign matter detection, and defect detection. The large and small model collaboration scheme not only guarantees the effectiveness of the algorithm, but also controls the cost of the overall solution. The Xinghan model will also increase customer stickiness, improve the effectiveness of products and solutions, and explore the true value of data to a greater extent through ecological openness.

Profit forecasting and investment advice. We believe that under the influence of the G-side, the company's 2024H1 performance is under overall pressure. Along with the gradual implementation of favorable policies, the company's G-side business is also expected to improve, thus driving the recovery of the company's performance; in addition, the company's overseas business is developing smoothly, and “going overseas” is expected to become an important growth point for the company in the future; in terms of B-side business, the company's 2024H1 overall performance is relatively steady. The company is currently firmly committed to the long-term investment direction of the B-side business, and the future development of the B-side business is worth looking forward to; it is worth looking forward to the future development of the company and China. Mobile cooperation continues to advance. With the establishment of the China Migration Business Class Organization, the company may launch more businesses in 2024H2, thereby driving the company's long-term performance growth. We estimate that the company's net profit for 2024/2025/2026 will be 3.996/4.678/5.591 billion yuan, and EPS will be 1.21/1.42/1.70 yuan, respectively, giving 2024 dynamic PE 20-22 times, and a reasonable value range of 24.27-26.70 yuan for 6 months, maintaining the “superior to the market” rating

Risk warning: Risk that industry demand falls short of expectations and the development of artificial intelligence-related technology falls short of expectations.