Investment logic

The company is a global AIoT leader. It relies on CLP to build a 0.03 million+ hardware SKU matrix based on IoT sensing capabilities, build a 200+ software product family based on AI cognitive capabilities, and unify components through a centralized approach to serve scenario-based and fragmented business requirements. The company has five major businesses: PBG (Public Service Business Group), EBG (Enterprise Business Group), SMBG (Small and Medium Business Group), innovative businesses, and overseas main businesses. It has completely transformed from a security manufacturer to a digital solution provider.

The implementation scenarios in the Internet of Everything era continue to expand, and the innovation-driven product matrix continues to be rich. 1) Demand side: The downstream of the company covers dozens of types of implementation scenarios, with differentiated digital requirements and specific industry expectations. The growth driver resonates with the expansion of downstream implementation scenarios in thousands of industries and the increase in value of a single scenario in the context of digital transformation. 2) Supply side: The company includes 200+ software products and 0.03 million+ hardware SKUs. The essence behind the rich product matrix is the strengthening of underlying technical capabilities.

Innovative business+overseas+ E-side drives growth; SMBG recovers weakly; P-side bottoms out.

1) Innovative business: Demand from emerging markets such as the company's card smart home+machine vision+smart car is expected to increase YOY +24% in 24 years. 2) Overseas main business: One country, one policy, localized marketing, breakthroughs have been made in the introduction of new categories, and the penetration rate in emerging countries has increased. It is estimated that YOY +14% in 24 years. 3) EBG: Technological transformation enhances the competitiveness and trade circulation efficiency of the manufacturing industry, Yunmou SaaS enables trade circulation, and the digital business advances towards the core of production. It is estimated that YOY +6.5% in 24 years. 4) SMBG: The SME downstream scenario is extremely fragmented, enabled by programmatic links, or with weak macroeconomic recovery. Yoy is expected to be +0.5% in 24 years. 5) PBG: Traditional security has switched to urban governance. Domestic special bonds have been issued one after another in '24, and the growth rate of total project tenders has recovered. It is expected to be YOY -6% in '24.

Software and AI contributed to excessive gross profit margins, and the Guanlan Big Model helped reduce costs and improve efficiency. The company's software value added is the main source of excess gross profit, with software business revenue accounting for about 21.3% in 2023. The AI Guanlan model empowers externally to achieve better recognition results (recognition rate ↑ 18-63%) with a lower sample size (90% + training data reduction), and enables digitalization and programming automation of production planning/marketing internally.

Profit forecasts, valuations, and ratings

The company's revenue for 24-26 is estimated to be 97.49/109.51/124.56 billion yuan, net profit to mother is 14.36/17.88/21.58 billion yuan, and EPS 1.56/1.94/2.34, respectively. Using the price-earnings ratio method, the company was given a 25-year PE valuation of 20 times, with a target price of 38.74 yuan/share. First coverage, giving a “buy” rating.

Risk warning

The risk that domestic macroeconomic recovery falls short of expectations; the risk of a tightening geopolitical environment; and the risk of exchange rate fluctuations.