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The company released its 2024 semi-annual report: 2024 H1 gross operating income was 2.958 billion yuan (-3.61% YoY), net profit to mother was 0.192 billion yuan (-22.70% YoY), and net profit after deduction was 0.174 billion yuan (-17.44% YoY).

Single Q2: Total operating income was 1.659 billion yuan (-5.61% YoY), net profit to mother was 0.186 billion yuan (YoY +44.66%), net profit after deduction was 0.176 billion yuan (+50.12% YoY).

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The results are consistent with those disclosed in the express report and are in line with expectations. The cost business was stable in the first half of the year, and fee control results were remarkable. It is expected that this trend will continue throughout the year. By business, the digital cost business (original cost business) achieved revenue of 2.459 billion yuan, an increase of 4.23% over the previous year; the digital construction business achieved revenue of 0.288 billion yuan, a year-on-year decrease of 37.46%. In Q2 alone, digital cost business revenue was 1.355 billion yuan, up 4.07% year on year; digital construction business revenue was 0.181 billion yuan, down 42.72% year on year. The company's gross margin for the first half of the year was 86.7%, up 1.2 pcts year over year. Q2 gross margin was 86%, up 1.3 pcts year over year. We think it is mainly due to the restructuring of revenue and the increase in the share of cost business.

The effect of improving efficiency and controlling fees was obvious, and net interest rates bottomed out and rebounded. Sales expenses, R&D expenses, and management expenses changed by -14.2%/-4.6%/+12.3% in the first half of the year, respectively. Excluding revenue from other types of financial services, the sales expense ratio, R&D expense ratio, and management expense ratio were 24.6%/27.9%/24.0%, respectively. Among them, management expenses decreased by 16.9% year-on-year in Q2, mainly due to fluctuations in management expenses due to staff cuts. The net profit margin for the first half of the year was 6.48%, and the net profit margin for Q2 recovered to 11.20%.

The digital cost business is growing steadily, and it continues to upgrade from single-post tools to full-cost application scenarios. The increase in revenue from the digital new cost business is mainly due to an increase in the carry-over of early cloud contracts and an increase in products such as contract clearance. As of June 30, the company's contract debt was 2.353 billion yuan, an increase of 0.216 billion yuan in the Q2 period. Cloud revenue was 1.877 billion yuan, down 0.4% year on year; cloud contract amount was 1.547 billion yuan, down 1.2% year on year, basically the same as last year.

We believe that given the importance of cost software in the bidding process, revenue will continue to show resilience, bringing stable cash flow and net profit to the company. On the one hand, cost products increase product value while opening up new growth space. Product renewal rates and application rates have all increased compared to the same period last year, and customer stickiness continues to increase. On the other hand, digital new cost products closely focus on enterprise cost control needs. There have been breakthroughs in major customer cooperation, product application rates continue to increase, value continues to be consolidated, and the effect of improving quality and efficiency is remarkable. Among them, the AI version of cost estimation is 7 times more efficient than manual cost estimation.

The digital construction business continues to restructure, focusing on the four core dragons. The company adjusted the management approach of the construction business, shifting from pursuing the scale of operation to pursuing the quality of operations and increasing the management of business profitability and cash flow. In the core four Xiaolong business, the number of projects in use in material control products increased 14% year over year. The product integrates AI algorithms into multiple scenarios to achieve a double improvement in efficiency and efficiency; the user base of labor management products has grown steadily, and new values such as wage management and workplace personnel positioning have been officially released and recognized by customers; intelligent tower crane products in intelligent hardware have achieved technological breakthroughs, and radar map refresh intervals of less than 10 minutes have been achieved. The recognition rate of common materials for AI lifting objects is over 90%. We expect that along with the improvement of the revenue structure, the company's pursuit of operational quality will show results in the second half of the year, and the gross margin of the digital construction business may increase in the future.

Profit forecasting and valuation

The company's 2024-2026 revenue is expected to be 6.994, 7.482, and 7.996 billion yuan, up 6.56%, 6.99%, and 6.86% year on year; net profit to mother is 0.693, 0.911, and 1.004 billion yuan, up 498.45%, 31.37%, and 10.22% year on year. Select the closing price of August 27, 2024, corresponding to 22x PE in 2024, maintaining a “buy” rating.

Risk warning

Other risks such as actual customer demand and new product promotion falling short of expectations, progress in synergy effects and intelligent function upgrades falling short of expectations, risk of increased competition, and overall industry risk.