Matters:

The company announced its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 2.707 billion yuan, a year-on-year decrease of 7.72%, and realized a net profit loss of 0.592 billion yuan (vs. loss of 0.554 billion yuan for the same period last year).

Ping An's point of view:

The company's business growth is still under pressure, and the decline in revenue in a single quarter narrowed. In the first half of 2024, the company achieved revenue of 2.707 billion yuan, a year-on-year decrease of 7.72%. Looking at a single quarter, the company achieved revenue of 1.672 billion yuan in the second quarter, a year-on-year decrease of 2.84%. The decline was narrower than in the first quarter (YoY -14.66%). By business segment, the company's cybersecurity business revenue in the first half of the year was about 1.398 billion yuan, a year-on-year decrease of 7.34%, accounting for 51.65% of the company's revenue. The revenue from the cloud computing and IT infrastructure business was about 1.106 billion yuan, a year-on-year decrease of 4.43%, accounting for 40.85% of the company's revenue. Basic network and IoT business revenue was approximately 0.203 billion yuan, a year-on-year decrease of 24.13%. On the profit side, the company achieved a net profit loss of 0.592 billion yuan in the first half of 2024, a slight increase compared with a loss of 0.554 billion yuan in the same period last year.

Gross margin declined year on year, and the total three fees (sales, management, R&D expenses) decreased year over year. In terms of gross margin, the company's gross profit margin for the first half of 2024 was 61.34%, down 3.14pct from the same period in 2023, mainly due to the year-on-year decline in gross margins of the cybersecurity business and cloud computing business, as well as an increase in the share of cloud computing businesses with low gross margins. In terms of expenses, the company continued to implement cost reduction and efficiency measures. The total three fees (sales, management, R&D expenses) for the first half of 2024 were 2.532 billion yuan, a year-on-year decrease of 7.36%. However, due to negative revenue growth, the company's expense ratio increased slightly by 0.59 pct to 89.97% year on year during the first half of the year.

The company continues to improve product competitiveness. In response to the challenges and opportunities brought about by changes in the internal and external environment, on the one hand, the company continued to increase investment in AI technology research and development and released the upgraded version of Convinced Security GPT 3.0. As of May 2024, more than 130 users had completed the test application and delivery of Convinced Secure GPT in real environments. We believe that the company's forward-looking layout in the field of artificial intelligence is expected to inject growth momentum into the company's medium- to long-term development. On the other hand, the company released the 6.10.0 version of the hyperconverged/cloud platform (HCI&SCP&sCloud), which introduced technical improvements in areas such as Xinchuang upgrades, software-defined reliability, high business performance, and native security within the cloud. Storage EDS released the 502 high-performance version, which targets unstructured data production scenarios in high-precision fields, such as software development, chip design, video production, etc., and file reading performance has improved markedly. We believe that the company actively enhances the competitiveness of the product market, which will help the company to allocate market resources in a timely manner according to changes in demand and seize key market opportunities.

Profit forecast and investment suggestions: According to the company's 2024 semi-annual report, we adjusted the company's profit forecast. The company's net profit for 2024-2026 is estimated to be 212 billion yuan (previous value was 0.308 billion yuan), 0.312 billion yuan (previous value was 0.452 billion yuan), and 0.432 billion yuan (previous value was 0.614 billion yuan), corresponding to the closing price on August 26, respectively. PE was 92.8 times, 63.0 times, and 45.5 times, respectively. The company is a leading ICT manufacturer in China, and has strong competitiveness in cybersecurity, cloud computing, and basic networks. Although the company's performance has fluctuated to a certain extent due to internal and external factors in recent years, the company's core competitiveness still exists, and breakthroughs continue to be made in the fields of cybersecurity, artificial intelligence, cloud computing, etc. We are still optimistic about the company's industry position and medium- to long-term development, and maintain a “recommended” rating.

Risk warning: 1) Technical risk. The company has always invested heavily in R&D, and new products in the security and cloud computing business continue to be launched, but if these products fail to contribute to the company's growth for a long time, it may affect the company's revenue growth and cause waste of resources. 2) Market risk. Competition in the cybersecurity and cloud computing market is becoming fierce, and market homogenization is beginning to become obvious. If companies slow down in transformation and adjustment, they may lag behind in competition. 3) Economic recovery fell short of expectations. If government and corporate IT spending remains conservative, the company's revenue and performance may be greatly affected.