Matters:

Recently, the company released its 2024 semi-annual report: in the first half of 2024, it achieved operating income of 0.873 billion yuan, a year-on-year decrease of 13.07%; net profit loss to mother of 0.206 billion yuan, loss of 0.212 billion yuan in the same period last year; loss of 0.216 billion yuan in non-net profit deducted from mother and 0.222 billion yuan in the same period last year.

Commentary:

Cloud computing and cloud security revenue grew steadily, and the company's profitability improved significantly. In the first half of 2024, the company's performance was under pressure. By product, basic security products achieved revenue of 0.531 billion yuan, down 20.01% year on year; big data and situation awareness products and services achieved revenue of 0.063 billion yuan, down 12.03% year on year; basic security services achieved revenue of 0.14 billion yuan, down 9.45% year on year; and cloud computing and cloud security products and services achieved revenue of 0.132 billion yuan, up 20.19% year on year. In terms of gross margin, gross margin for the first half of 2024 was 63.30%, up 7.86pct year-on-year.

The cost side is continuously optimized to create a full-coverage sales network. In terms of expenses, total expenses decreased by 2.63% year on year. Among them, R&D expenses fell 5.80% year on year, mainly due to the company's basic completion of the layout of new directions and technologies in the early stages; management expenses decreased by 30.64% year on year, mainly due to the year-on-year reduction in share payment expenses; sales expenses increased 9.71% year on year, continuing to maintain investment in marketing to achieve a linked operating model of industry+region and direct sales+distribution. Currently, in terms of industry markets, the company has 93 industry marketing divisions; in terms of regional markets, there are 33 provincial sales platforms and 58 branch sales agencies; in terms of channel markets, it has 3,580 certified industry and commercial partners, covering local and municipal governments, health care, education, and enterprise markets, covering more than 90% of the local, city and county markets.

We continue to develop new security businesses, and our performance is outstanding. The company continues to improve and innovate in industries, topics, new scenarios and systemized solutions, and launched solutions such as smart city rail network security, integrated vehicle-road cloud security, smart hospital security on the cloud, smart emergency IoT security, and government cloud cryptographic security, and continuously expanding solutions capabilities for new businesses and new scenarios. In terms of new business directions, cloud security revenue increased 51.52% year on year, cloud computing revenue increased 35.80% year on year, and Xinchuang security revenue increased 22.99% year on year.

Investment advice: Considering that the cybersecurity industry is still under pressure in the first half of 2024, we adjusted our profit forecast. The company's revenue for 2024-2026 is 3.386/3.834/4.273 billion yuan (the original value in 2024-26 was 3.633/4.169/4.713 billion yuan), corresponding to a growth rate of 8.4%/13.2%/11.5%; net profit to mother is 0.2/0.306/0.391 billion yuan (original value for 2024-26) 0.295/0.415/0.527 billion yuan), the year-on-year loss was 53.0%/27.7%, respectively; the corresponding EPS (diluted) was 0.17/0.26/0.33 yuan, respectively. In terms of valuation, with reference to comparable companies, we gave the company 35x PE in 2024, corresponding to a target price of 6 yuan, maintaining the “recommended” rating.

Risk warning: Industry competition intensifies; policy promotion falls short of expectations; product application falls short of expectations.