1H24's revenue was slightly lower than our expectations, and the net profit was in line with our expectations for 1H24:1H24, the company's revenue was 0.784 billion yuan, -14%; net loss to mother was 23.67 million yuan, which was 60.83 million yuan narrower than the same period last year; 2Q24, the company's revenue was 0.49 billion yuan, -13.4% year on year; net profit to mother of 28.98 million yuan (1.87 million yuan in the same period last year). Revenue was slightly lower than our expectations, but the revenue structure improved, and the procurement and operation business resumed growth. The company's lower revenue than expected was mainly due to the tightening of downstream customer budgets and the decline in project-related business revenue; the company's strict cost control and net profit loss narrowed, and the performance was in line with our expectations.

Development trends

Recruiting operations have resumed positive growth. In the first half of the year, the company's revenue from smart procurement, smart government, and digital construction was -5.3%, -26.1%, and -5.1%, respectively. In terms of smart procurement business, revenue from non-recruitment operations and procurement operations was -15.3% and +8.6%, respectively. The recruitment operation grew well. On the one hand, the company actively promoted its own SaaS platform. In the first half of the year, 65 new zones were added, and the number of zones increased by 54.76% over the same period last year; on the other hand, the company continued to develop bidding tools and services. In terms of smart government business, business revenue performance is mainly affected by tight customer budgets, etc. In terms of digital construction business, business revenue is relatively stable. By the end of June 2024, the company's smart construction site application platform covered 14 provinces and more than 3,400 projects; it also continued to optimize the new site list cost software V11.

Improved revenue structure and cost control strictly support profit performance throughout the year. 1H24's gross profit margin was 61.37%, up 7.82ppt year on year, mainly due to strict control of operating costs, a year-on-year decrease of 28.5%. At the same time, the share of revenue from high-profit procurement operations increased. 1H24 sales expenses, management expenses, and R&D expenses were -15.3/-10.3/ -9.2% year-on-year, respectively, mainly due to continuous process optimization, strengthening cost control, and improving the quality of operations. 1H24 net profit margin was -3.0%, narrowing by about 6.2ppt year on year. We believe that the company's cost and expense management in the first half of the year was good, which is expected to support the growth of net profit throughout the year.

Strengthen repayment management and improve cash flow from operating activities. The cash flow from 1H24 operating activities was -0.23 billion yuan, a decrease of 0.136 billion yuan compared to the same period last year, mainly due to strengthened repayment management and good cost control. Accounts receivable at the end of 1H24 were $1.329 billion, -5.28% YoY. The 1H24 credit impairment loss was $0.92 million, which is a significant reduction compared to the same period last year (9.87 million yuan in the same period last year). We believe it is due to the company's strengthened repayment management and order acceptance.

Profit forecasting and valuation

Considering that business revenue related to the project system slightly exceeded expectations, we lowered our 2024/25 revenue by 4.1/ 3.7% to 2.163/2.392 billion yuan, respectively. However, considering the company's strict 1H24 cost and expense control, we believe it is expected to support 24/25 net profit performance and maintain the 2024/25 profit forecast unchanged. The current stock price corresponds to the 2024/25 price-earnings ratio of 29.5/19.6. Maintaining an industry rating and a target price of 32.0 yuan, corresponding to 45.8/30.4 times the 2024/25 price-earnings ratio, with 55.3% upside compared to the current stock price.

risks

The resumption of procurement activities fell short of expectations, and the project acceptance progress fell short of expectations.