1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 1.66 billion yuan, -26% YoY, net profit to mother 0.154 billion yuan, or -41% YoY. Among them, 2Q24 revenue was 0.871 billion yuan, -36% YoY, and net profit to mother was 61.01 million yuan, or -63% YoY. The company's 1H24 performance was in line with our expectations.

1) There is significant downward pressure on overall revenue. 1H24 faced downward pressure from market demand and increased competition, and its main business revenue declined by a certain margin. By product, revenue from planning research/survey and design/comprehensive inspection/digital and smart business/low carbon and environmental protection business was -18%/-34%/-17%/-9%/-5%, respectively. 2) The cost control effect is good, and the comprehensive gross margin remains stable. 1H24's comprehensive gross margin was about 36.4%, only -0.4ppt year over year. Against the backdrop of declining revenue and an unfavorable market environment, the company's comprehensive gross margin remained stable. By product, the gross margin of the company's core business survey and design (accounting for about 50% of revenue in the first half of the year) was +1.1ppt to 41.6% year over year, and the gross margin of the low carbon and environmental protection business also improved sharply by 17.7ppt to 37.8% year over year, largely hedging the downward pressure on the gross margin of the remaining diversified businesses. 3) The cost rate increased year over year. The total cost rate of 1H24 Company's four items was about 21.4%, +3ppt year over year. Among them, the sales/management/R&D expense ratios were +1.5ppt /+0.5pp/ +1.2ppt, respectively.

4) Reduction in the scale of impairment. 1H24's accrued asset and credit impairment losses totaled about $62.76 million, a year-on-year decrease of $31.33 million. 5) Cash flow performance is under pressure. The net operating cash flow of 1H24 was -0.635 billion yuan, with a year-on-year increase of about 0.376 billion yuan. Due to the overall shortage of downstream capital in the industrial chain, repayment pressure was high, and procurement payments were relatively rigid, and the company's cash flow performance in the first half of the year was under pressure.

Development trends

The survey and design business is highly competitive, and demand is expected to recover in the second half of the year. 1H24's survey and design business was affected by weak downstream demand, and the revenue scale fell by about one-third, but thanks to good cost reduction results, the overall gross margin of the business increased slightly over the same period last year. The amount of new contracts signed by the company in the first half of the year was basically the same as compared to the same period last year, and the expansion process outside of Jiangsu Province is good. Looking forward to the future, we believe that the company's core survey and design business is still highly competitive, and business revenue and profit contributions are expected to be further reflected in the second half of the year.

Digital and smart businesses continue to expand. The company actively lays out around hot spots in the industrial chain such as the low-altitude economy and vehicle road cloud. In the first half of the year, it successfully won the bid for several low-altitude economic projects such as “Jiangsu Transportation Holdings Low Altitude (Drone) Integrated Service Management System Construction”, and relied on its various divisions, research institutes and industrial clusters to build the full chain of vehicle road clouds. The company's digital intelligent transformation continues to advance.

Profit forecasting and valuation

Due to pressure on industry demand, we lowered the company's revenue and gross margin assumptions. We lowered 2024E net profit to mother by 37% to 0.521 billion yuan, and introduced 2025E net profit to mother of 0.604 billion yuan. The current stock price corresponds to 2024/25E 10x/8x P/E. We maintain the company's outperforming industry rating. Considering that the company's expansion in new fields is progressing well and the valuation is at a low level, we maintain a target price of 9.4 yuan, corresponding to 2024/25E 12x/11x P/E, implying 27% upward space.

risks

Revenue from the design business fell short of expectations, and competition in the industry intensified.