Description of the event

On August 22, the company released its 2024 semi-annual report. Among them, in the first half of 2024, the company achieved revenue of 2.707 billion yuan, a year-on-year decrease of 7.72%; in the first half of the year, net profit to mother was -0.592 billion yuan, a year-on-year decrease of 6.94%, and realized deduction of non-net profit of -0.654 billion yuan, a year-on-year decrease of 11.30%. 24Q2 achieved revenue of 1.672 billion yuan, a year-on-year decrease of 2.84% and a month-on-month increase of 61.56%; 24Q2 achieved net profit of 0.103 billion yuan, up 27.10% year-on-year and 78.89% month-on-month, and realized deduction of non-net profit of 0.144 billion yuan, up 10.73% year-on-year and 71.73% month-on-month.

Incident reviews

Macroeconomic factors have put pressure on the revenue side, and cost reduction and efficiency are beginning to bear fruit. In the first half of 2024, the domestic macroeconomic environment was still slowly recovering. Downstream customers were cautious about investing in IT services such as cybersecurity and cloud computing. Competition in the superimposed market was still intense, and the company's revenue declined year-on-year in the first half of the year. In the first half of 2024, the company's gross margin was 61.34%, down 3.14% year on year, mainly because on the one hand, the share of cloud computing business with low gross margin continued to rise, and on the other hand, the gross margin of the company's various business lines was under pressure. The gross margins of cybersecurity, cloud computing and IT infrastructure, basic networks and IoT businesses decreased by 1.24%, 5.31%, and 4.30%, respectively, year on year in the first half of the year. In order to cope with the uncertainty of the external environment, the company continued to reduce costs and increase efficiency. Overall sales, management and R&D expenses fell 7.36% year-on-year in the first half of the year. In addition, the company's net operating cash flow for the first half of 2024 was -0.977 billion yuan, a year-on-year decrease of 239.94%, mainly due to the company's strategic preparation to cope with the price increase of some upstream raw materials, and an increase in cash for purchasing goods and receiving labor payments.

The share of cloud computing business has increased, and enterprise customers have shown greater resilience. By business, 1) The company's cybersecurity business achieved revenue of 1.398 billion yuan in the first half of 2024, a year-on-year decrease of 7.34%, accounting for 51.65% of the company's overall revenue, mainly because revenue from mature product lines such as next-generation firewall AF and network-wide behavior management AC continued to decline. Although emerging businesses such as XDR and secure hosting services (MSS) continued to grow, the revenue scale was still small, and the driving effect on the overall growth of the security business was not obvious; 2) The cloud computing and IT infrastructure business achieved revenue of 1.106 billion yuan in the first half of the year The billion yuan decreased by 4.43% year on year, accounting for 40.85% of the company's overall revenue, mainly due to the decline in revenue from desktop cloud products, which account for a relatively high share; 3) The basic network and IoT business achieved revenue of 0.203 billion yuan in the first half of the year, a year-on-year decrease of 24.13%, accounting for 7.50% of the company's overall revenue, mainly due to the decline in revenue of CineRui Network Technology in traditional commercial markets. By industry, corporate customer demand for IT construction showed some resilience. In the first half of 2024, corporate customer revenue increased 2.51% year on year, while revenue from government, public institutions, financial and operator customers fell 15.88% and 18.23% year on year, respectively.

Investment advice

As a leading domestic cybersecurity and cloud computing vendor, the company's short-term performance is under pressure, but in the medium to long term, with macroeconomic recovery and the implementation of industry policies, the rapid development of new businesses will drive the company's growth rate to increase. The company's 2024-2026 EPS is expected to be 0.59\ 0.93\ 1.28 respectively, corresponding to the company's closing price of 45.67 yuan on August 23, and the 2024-2026 PE will be 77.21\ 49.29\ 35.62, respectively. It is covered for the first time, giving it an “increase in holdings - A” rating.

Risk warning

Product iterations fell short of expectations. Currently, revenue from the company's mature product line continues to decline, while emerging strategic business products continue to grow. If future iterative upgrades of the company's emerging products fall short of customer or market expectations, it will adversely affect the company's development.

Macroeconomic downside risks. Since the investment of the company's downstream customers in IT services such as network security and cloud computing is affected by the overall macro environment, if domestic macroeconomic growth continues to be pressured in the future, it may cause the company's downstream customers to reduce IT budgets such as network security and cloud computing, thereby adversely affecting the company's business development.

Market competition increases risk. Currently, there are many participants in the cybersecurity industry, and there is a high degree of standardization and homogenization of products in the field of firewalls and bastion machines. If manufacturers in the same industry adopt measures such as price reduction and expansion of sales channels in the future, it will adversely affect the company's business development.