Performance Overview: In the first half of 2024, the company achieved operating income of 1.946 billion yuan, -2.63% year on year; net profit to mother 0.172 billion yuan, -13.68% year over year; net profit after deducting non-return to mother 0.18 billion yuan, +4.1% year over year.

Sanitation orders have increased, the layout continues to expand, and the brand strength is superior

2024H1 added a total bid amount of 3.585 billion yuan, a year-on-year increase of 73.57%, and an annualized amount of 0.442 billion yuan, an increase of 4.56% over the previous year. As of June 30, '24, the total number of orders pending execution by the company exceeded 46.2 billion yuan. In terms of regional distribution, East China accounted for 60.23% of the new bid amount, and the business landscape continued to expand.

Recently, the company successfully completed sanitation assurance tasks for large-scale events such as the 15th World Economic Forum New Leaders Annual Meeting and the 2024 Dalian Summer Davos Forum, once again verifying the company's superior brand strength.

Net profit after deducting non-return to mother increased 4.1% year on year, with significant cost reduction and efficiency results. The company had relatively many current non-recurring losses: 1. Non-current asset scrapping losses increased. Non-current asset scrapping losses increased by 10.2 million yuan in the first half of the year, an increase of 5.77 million yuan over the previous year. 2) Government subsidies included in the current period decreased by 2.07 million yuan year-on-year. Net profit without return to mother increased year-on-year, and the company's operating capacity is still impressive.

The digitalization of the company's internal application platform continues to accelerate, standardize personnel management. The regional responsibility system met the standard amount of 101.12%, and management efficiency increased 1.01% over the same period last year. The company actively integrates the advantages of all parties to jointly build the “Digital Intelligence City Research Institute”, which focuses on the deep empowerment of AI technology for comprehensive management scenarios in all dimensions of the city's life cycle. The application of digitalization helped the company reduce costs and increase efficiency. In the first half of the year, the company's gross profit margin was 26.23% and net profit margin was 8.89%, up 0.2 pct and 0.55 pct, respectively; management expenses were 0.116 billion yuan, a year-on-year decrease of 16.77%, and operating efficiency continued to improve.

Cash repayments are under pressure. It is expected that in the future, along with improvements in local government debt, the company's total accounts receivable will be 2.434 billion yuan, an increase of 0.277 billion yuan over the end of the previous year; contract assets were 0.934 billion yuan, an increase of 0.184 billion yuan over the end of the previous year. Due to reasons such as delays in the issuance of project assessment results by individual project owners, the company's repayment was under some pressure.

However, the company's repayment improvements are relatively predictable: 1) As of June 30, 2024, the company's largest debtor's arrears accounted for 18.94% of the company's total accounts receivable & contract assets. Some and only this customer owed more than 0.1 billion yuan. 2) Most of the company's customers are government departments, with good credit and relatively guaranteed repayment. 3) Accounts receivable within 1 year account for more than 60%, and the overall account age is manageable. We believe that as local government debt conversion progresses, it is not ruled out that the company's accounts receivable will have some positive performance in the future.

Investment advice: We predict that the company's net profit due to mother in 2024-2026 will be 0.31, 0.347, and 0.431 billion yuan, respectively, -2.23%, 11.99%, and 24.35%, respectively; diluted EPS will be 0.76, 0.85, and 1.06 yuan, respectively. The PE corresponding to the stock price on August 30 will be 11.24, 10.04, and 8.07 times, respectively. The previous profit forecast values for 24/25 were 0.413 and 0.469 billion yuan, respectively. The reason for the reduction was a large increase in the company's accounts receivable and a certain increase in credit impairment. Maintain the company's “gain” rating.

Risk warning: Poor repayment of accounts receivable requires accounting for the risk of bad debts; risk of increased industry competition and decline in profits; risk of fixed increase issuance failure; risk of new orders falling short of expectations; risk of rising labor costs