Incidents:

On August 24, the company released its 2024 semi-annual report: 2024H1. The company achieved revenue of 2.89 billion yuan, a year-on-year increase of 15.70%, net profit to mother 0.113 billion yuan, an increase of 21.78% year-on-year, after deducting net profit of 0.097 billion yuan, and a year-on-year increase of 12.04%.

Investment highlights:

2024H1's performance is growing steadily, and R&D investment continues to increase

With 2024Q2, the company achieved revenue of 1.465 billion yuan, a year-on-year increase of 5.36%. The company's related business growth led to a steady increase in revenue; net profit to mother was 0.053 billion yuan, up 3.64% year on year, and net profit not returned to mother was 0.041 billion yuan, down 26.36% year on year.

2024H1, the company maintained steady growth with a gross margin of 18.76%, a year-on-year increase of 0.10pct, a net profit margin of 4.20% and a year-on-year increase of 0.31pct. The company's sales/management/R&D expenses were 4.17%/4.20%/6.91%, respectively, -0.99pct/-0.64pct/+0.10pct year-on-year, respectively. The company invested 0.2 billion yuan in R&D, and the technology investment rate reached 6.91%. A total of 70 intellectual property rights were applied for, including 17 invention patents. The company promoted informatization and digitization in the ToG and ToB fields, and insisted on improving core technical capabilities through science and innovation system construction and core technology development.

The main structure of the Songjiang Data Center Phase II is capped, and the G+B-side digital construction sub-business continues to be promoted: 1) Cloud service big data: In May 2023, the second phase of the Songjiang Data Center achieved energy consumption indicators; 2024H1, the second phase of the project has fully capped the main structure, and the company completed the construction of the Shanghai computing power service platform at the Baoshan node of the Baoshan Big Data Center. 2) Industry solutions: including Shanghai Yunsai Zhilian, Yidian Xinsen, and Yidian Information Network, which focus on digital transformation application services, covering fields such as urban safety and people's livelihood intelligence. 3) Smart products:

This includes electronics and instrument companies, which own scientific instruments and testing instrument brands such as “lightning, object light”.

By industry: The company further promotes the construction of major informatization, digitalization and intelligence projects in the ToG and ToB fields. 1) Transportation: 2024H1, the Shanghai Railway Dispatch Operation and Skills Training Base Cloud Platform Phase I supply and service project constructed by the company, has basically completed the cloud platform deployment and commissioning. 2) Entertainment: In the first half of the year, the company won the bid for the Yangtze River Delta intelligent project involving 7 major modules and 26 systems; 3) Municipal livelihood: In the first half of the year, the company renewed the CIS three-year operation and maintenance service project from 2024-2027.

Explore the “AI+” business model and benefit from the continuous development of data elements to explore the business model of artificial intelligence technology. 1) Intelligent Computing Center IDC: Accelerate the construction of the Songjiang Big Data Center (Phase II) and build a high-quality intelligent computing center to support large-scale intelligent computing power clusters; 2) Computing power platform services: In June 2023, Shanghai Intelligent Computing Technology Co., Ltd. was established. Step Star holds 10% of the shares and Yunsaizhi holds 11% of the shares; 3) Vertical model application: focusing on vertical fields centered on government services and large state-owned enterprises. We believe that the official operation of the company's Songjiang data center is expected to increase the company's revenue; benefit from the computing power company and its shareholders' background, enhance investment returns; and explore the application of vertical models to help dig deeper into customer needs and expand the business model.

2024 is the first year of the official launch of the “Data Factor X” campaign. As the main force in the digital transformation and construction of Shanghai's cities, the company is expected to assume the heavy responsibility of public data operations in Shanghai. 2024H1, the company has successively won bids for several regional big data center government cloud construction and operation and maintenance projects. The municipal supercomputing center public computing power service platform constructed by the company was delivered and accepted in the first half of 2024.

Profit forecast and investment rating: The company is an important platform in the cloud and data field under the Shanghai State-owned Assets Administration Commission. It is expected to benefit from the construction of the Songjiang Big Data Center and the accelerated implementation of data element industry plans. Based on the principle of prudence, the proposed project will not be included in the profit forecast. We expect the company's operating income in 2024-2026 to be 6.159/7.126/8.17 billion yuan, net profit to mother 0.238/0.291/0.366 billion yuan, EPS 0.17/0.21/0.27 yuan/share, and the PE corresponding to the current stock price is 54.31/44.47/35.34X, maintaining the “increase” rating.

Risk warning: The construction of an intelligent computing center falls short of expectations, the development of large models falls short of expectations, macroeconomics affects downstream demand, increased market competition, new product development falls short of expectations, etc.