The company's 24Q2 revenue decline and profit losses all narrowed. In the first half of the year, the corporate side showed resilience in demand, and cost control continued to be optimized. Based on dimensions such as R&D innovation, channel system, and market position, we are optimistic about the long-term development of the company and maintain strong recommendations.

Incident: The company released its semi-annual report. Revenue for the first half of the year was 2.707 billion yuan, YoY -7.72%; net profit attributable to mother -0.592 billion yuan, YoY -6.94%; net profit not attributable to mother -0.654 billion yuan, YoY -11.30%. 24q2 revenue/net profit attributable to mother/net profit after deducting non-return to mother YoY -2.84%/+27.10%/+10.73%. 24Q2 revenue declines and profit losses all narrowed in a single quarter, and the results were in line with expectations.

Demand on the corporate side showed resilience, and the government and financial sectors showed fatigue due to the impact of the macroeconomic environment. In the first half of the year, the company's revenue showed a differentiated trend according to industry distribution: enterprise-side revenue of 1.376 billion yuan, YoY +2.51%, showing some strength to withstand pressure; revenue from the government and public institutions was 1.069 billion yuan, YoY -15.88%; at the same time, financial and other revenue was 0.262 billion yuan, YoY -18.23%. These two components were mainly affected by macroeconomic factors, and the recovery process was slow.

It will take time for network security demand to recover, and the development of cloud business and Xinrui Network Technology is under pressure. By product line, Internet security revenue fell 7.34% in the first half of the year, mainly due to the decline in revenue from mature product lines such as AF and AC. At the same time, new product lines such as XDR and MSS grew in revenue but were still small. In contrast, the cloud business recorded negative growth of 4.43%, and the share of revenue increased to 40.85%. SDDC, storage, hosting clouds, etc. continued to grow, but the relatively larger desktop cloud business weakened its growth momentum due to customer budget cuts. Revenue from the basic network and IoT business fell 24.13% year over year, mainly due to macro factors and increased competition. Xinrui Network Technology's revenue in traditional commercial markets declined.

Gross profit margin and cash flow performance are under pressure, and cost control continues to be optimized. The company's overall gross profit margin in the first half of the year was 61.34%, down 3.14 pct year on year. On the one hand, it was affected by the increase in revenue share of cloud computing business with low gross margin. On the other hand, the gross margins of cybersecurity, cloud computing, basic networks, and the Internet of Things declined by 1.24/5.31/4.30 pct year on year, respectively. The overall gross margin was clearly under pressure. Sales/management/R&D expenses were -10.26%/+1.93%/-5.29%, respectively, and the total growth rate of the three expenses decreased by 7.36%, reflecting the company's focus on cost control and continuous improvement in operating efficiency. The net operating cash flow was -0.977 billion yuan, compared to -0.287 billion yuan in the same period last year. The main reason was that the company made strategic preparations to cope with price increases in some upstream raw materials.

Maintain a “Highly Recommended” investment rating. The company's estimated 24-26 revenue is 7.681/8.2/9.198 billion yuan, and net profit to mother is 0.198/0.337/0.47 billion yuan. Affected by various factors, the company's current development is under pressure, but we believe that the company attaches importance to R&D investment, has strong innovation capabilities, has a complete channel system, has strong competitiveness and leading market position in various segments of network security and cloud products, has broad room for long-term growth, is optimistic about long-term development, and maintains strong recommendations.

Risk warning: Downstream customer demand recovery falls short of expectations; new product expansion falls short of expectations, etc.