Incident Overview: The company released its semi-annual report on August 28, 2024. The company achieved operating income of 1.984 billion yuan in the first half of the year; net profit to mother and net profit after deducting non-return to mother were -2.7 billion yuan and -290 million yuan respectively, reducing losses over the previous year.

Gross margin increased dramatically, and independent products continued to gain strength. The company focuses on the development of the Internet communication business, further promotes the continuous development of independent products, industry solutions and service businesses with the Internet communication business as the core, and has established a relatively complete Internet communication market, R&D and technical service system. The company makes every effort to build an independent security product and service system to form a software and hardware product chain from operating systems and middleware to application products. Kirin's operating system industry position continues to be consolidated, and the “Entropy Boat” digital intelligence platform has received high market attention. From a gross margin perspective, the company's overall gross margin for 2024H1 was about 44%, an increase of about 8 percentage points over the same period last year, mainly due to a decrease in business volume in the current period and an increase in the share of independent software product business with high gross margin.

Hold on to core assets to give full play to your strengths, and you can expect long-term growth potential. Kirin Software is positioned for research, product development, and industrial promotion of operating system technology, and has now formed specialized product lines represented by desktop operating systems, server operating systems, intelligent connected operating systems, industrial operating systems, and intelligent computing operating system products. 2024H1 Kirin Software's revenue was 0.498 billion yuan, a year-on-year growth rate of nearly 15%.

According to CCD consultant statistics, Kirin Operating System has been ranked No. 1 in China's Linux market share for 13 consecutive years. At the same time, it continues to contribute to independent open source and donate OpenKyLin to the Open Atom Open Source Foundation. As of the semi-annual report, Kirin Software has established cooperative relationships with 0.0255 million ecosystem vendors to jointly promote the construction of a high-quality ecosystem of operating systems.

At the same time, the company is actively working on taxation, financial supervision and other businesses to continuously strengthen its own value. 2024H1, the company targets the tax industry, carries out specialized industry management with information system services as the core, builds industry competitiveness, organizes the implementation and delivery of products and services, and successfully guarantees the smooth operation of core collection and administration, data resource platforms, electronic taxation bureaus, social security collection, export tax rebates, etc. In terms of financial supervision, the company deepens cooperation with regulators, continuously improves solutions, continues to invest in product research and development, and establish full-process business supervision. Continue to make efforts on the financial institutions side to develop a new generation of unified supervision and reporting platforms, build a smart supervision system, and create a new growth point for the supervision business for the next three to five years.

Investment advice: The company is an important “national team” in the field of innovation and the core power of the Internet communication business under China Electronics. It has established a relatively complete Internet communication market, R&D and technical service system, grasps core assets in segments such as Kirin Software and Dameng Data based on its own advantages, and maintains a leading position in the operating system and database segments. Under the important opportunities of Xinchuang and state-owned enterprise reform, the company has built a solid foundation for long-term growth with its autonomous safety advantages. The company's net profit for 2024-2026 is estimated to be 0.133/0.227/0.313 billion yuan, and the corresponding PE is 190X, 112X, and 81X, respectively, maintaining the “recommended” rating.

Risk warning: the risk of increased competition in the industry; the release of downstream demand falls short of expectations; there is uncertainty about changes in technology routes.