Incident: On August 28, the company released its semi-annual report. During the reporting period, the company achieved operating income of 0.22 billion yuan, a year-on-year decrease of 28.68%, and realized net profit of 0.238 billion yuan, an increase of 129.44% year-on-year; achieved revenue of 0.1 billion yuan in the single second quarter, a year-on-year decrease of 47.53%, and realized net profit to mother of -0.163 billion yuan, an increase of 416.74% year-on-year losses.

The company's performance is under pressure due to macroeconomic and customer procurement contractions. During the reporting period, the company achieved revenue of 0.22 billion yuan, a year-on-year decrease of 28.68%, and achieved net profit of 0.238 billion yuan, and a year-on-year increase of 129.44%. The decrease in the company's revenue compared to the same period of the previous year was mainly affected by the following two aspects: on the one hand, due to the impact of the macroeconomic environment, the e-government market, and some important customers in the industrial control field of the company's traditional advantages have not yet resumed normal procurement; on the other hand, as the competitiveness of Longchip chip products increased, the company adjusted its sales strategy accordingly. Sales of complete model solutions were reduced, and solution revenue during the reporting period was 56.1734 million yuan, a year-on-year decrease of 64.14%. In terms of net profit, although the company actively controls fees, procurement of high-margin products in some industrial control fields has shrunk. Overall, the gross profit margin of the industrial control business was 52.47%, down 15.56 percentage points from the previous year. The decline in revenue and gross margin put pressure on the company's profits.

Actively respond to external challenges, iterate chip products to improve competitiveness, and control fees to cope with declining revenue pressure. During the reporting period, the company continued to invest in R&D to enhance the competitiveness of chip products. The total revenue for chip products in the first half of the year was 0.163 billion yuan, including 0.109 billion yuan for information chips, which already exceeded the revenue of information chips for the whole of last year and 54.1504 million yuan for industrial control chips. Chip sales revenue increased year-on-year for the first and second consecutive quarters of 2024. Furthermore, in order to cope with the downward pressure on revenue, the company actively controlled expenses. During the reporting period, the company's sales expenses and management expenses decreased by 6.67% and 22.50%, respectively. The macroeconomic pressure was compounded by the transition period of credit innovation. However, the company continued to iterate its main products to improve its competitiveness in the information technology field, drive chip sales through integrated solutions in the field of industrial control, and continuously open up the company's product market.

The company is committed to building an autonomous command system and industrial ecosystem, and continuously improving product performance and ecology. (1) In the field of information technology, in terms of desktop CPUs, ODM companies represented by Asus have actively developed the new generation of Longchip 3A6000 motherboards, improved the quality of Dragoncore motherboards, and supported machine manufacturers to launch a wide variety of product solutions, including desktops, all-in-one computers, notebooks, NUC, etc. Compared with the previous generation of 3A5000 products, the overall cost performance of the 3A6000 has been greatly improved. In terms of server CPUs, downstream manufacturers are supported to complete the development of Longchip 3C5000/3D5000 dual-socket and four-socket servers, and enter the marketing stage. Servers based on Longchip CPUs are selected for server collection packages for operators such as China Mobile. Revenue from information-based chip products increased by 186.98% year on year during the reporting period. At the same time, due to the increase in sales volume, the gross margin of this type of product gradually rebounded to 21.55%, an increase of 11.05 percentage points over the previous year; (2) In the field of industrial control, the company adopted a combination strategy to drive chip sales with solutions.

On the one hand, the cost performance ratio of Dragon Core embedded/special chips has been greatly improved to form the competitiveness of the embedded CPU open market. On the other hand, the company leverages the advantages of Longcore's mastery of underlying technology and ecological openness, supports industry ODM partners to radiate the industrial control industry chain, and supports equipment companies to make up for ecological deficiencies such as the development environment through solutions, and drive chip sales. During the reporting period, the company supported customers to form small-batch shipments based on the 2K0300 embedded board solution; supported printer customers to develop a series of black and white single-function, four-in-one computers, scanners, etc. based on the 2P0500, which will soon be introduced to the market; and supported NUC machines developed by customers based on 2K2000 and 3A6000, which have already been initially applied in energy and intelligent manufacturing companies. The company has a high degree of autonomy and control, and has continuously improved product capabilities and product ecology through continuous iterative product performance and market-based expansion.

Company profit forecast and investment rating: Affected by macroeconomics and customer procurement contraction, the company's performance is under pressure. The company continues to iterate product performance, improve the ecology, continue to increase chip revenue, and actively control fees to cope with declining revenue pressure. The company is committed to building an autonomous command system and industrial ecosystem, and continuously improving product performance and ecology. The company is expected to benefit as domestic substitutions are gradually implemented. We expect the company's net profit for 2024-2026 to be -1.96, 0.07, and 87 million yuan, respectively, with corresponding EPS of -0.49, 0.02 and 0.22 yuan, respectively.

The current stock price is 60, 47, and 35 times the 2024-2026 PS value, respectively. Maintain a “Recommended” rating.

Risk warning: Risk that product iteration falls short of expectations, market expansion falls short of expectations, and Xinchuang's progress falls short of expectations.