Incidents:

The company released its 2024 semi-annual report. In the first half of 2024, it achieved operating income of 1.574 billion yuan, an increase of 3.42% over the previous year; net profit to mother - 0.182 billion yuan, changed from positive to negative, after deducting net profit to mother - 0.1 billion yuan.

In terms of Q2 alone, 2024Q2 achieved operating income of 0.651 billion yuan, a year-on-year decrease of 11.3%; net profit to mother of -0.069 billion yuan, which changed from positive to negative, after deducting net profit to mother of -0.052 billion yuan, changed from positive to negative.

Comment:

The gross margin increased sharply from month to month. Looking at the strengthened expense management and repayment management sub-business, the company achieved revenue of 1.104, 0.458, and 0.012 billion yuan in the first half of 2024, respectively, of +14.13%, -15.14%, and -20.52% compared with the same period last year. The company maintained rapid revenue growth with China Mobile in the first half of the year, and gross margin increased 13.77pcts month-on-month to 64.59% in the second quarter. At the same time, the company strengthened expense management and repayment management. In the first half of 2024, the total three fees fell 2.69% year on year, repayment increased 13.69% year on year, accounts receivable balance decreased 2.42% from the end of 2023, and sufficient capital holdings. We believe that the company's healthy and sustainable development trend will continue in the future.

Changes in stock prices of participating companies affect the company's apparent net profit level. The decline in the company's apparent net profit to mother is mainly affected by changes in the share price of participating companies. Due to fluctuations in the stock price of the listed company “Aerospace Software”, the company confirmed investment income of -0.044 billion yuan in the first half of 2024, compared to 0.207 billion yuan in the same period last year; due to changes in the stock prices of participating listed companies “Yongxin Zhicheng” and “3D World”, the company's fair value change revenue was 0.062 billion yuan, compared to 0.105 billion yuan for the same period last year.

Mobile business synergy is prominent. In the first half of 2024, the company's emerging business innovations emerged. In the first half of 2024, the company was officially controlled by China Mobile and continued to explore business strategy collaboration: 1) completed the “Nine Days Taihe Security Model”; 2) completed the development and completion of a mobile cloud SaaS zero-trust secure access service; 3) undertook the construction of China Mobile's government and enterprise security operation center and has already been implemented. The company had a related transaction of 0.541 billion yuan with China Mobile in the first half of 2024 (considering only the portion of the company's sales of goods and provision of labor services to China Mobile), an increase of 191% over the previous year.

The company increased R&D investment in the direction of strategic innovation, and innovative achievements in the emerging security business sector continued to be demonstrated. In the first half of 2024, the company and China Mobile deepened R&D cooperation, and total R&D investment increased by 5.54% year-on-year. The company's revenue in the cloud-related security sector increased by more than 200% year on year, and revenue from cloud security, identity trust products, 5G+ industrial Internet security testing products, and IoT security access protection products increased by more than 150% year on year.

Profit forecasting and valuation

Considering the company's revenue growth in the first half of the year and the recovery in downstream demand, we adjusted our previous profit forecast and predicted that the company's revenue for 2024-2026 would be 5.149, 5.951, and 6.914 billion yuan, respectively, and net profit to mother of 0.696, 0.881, and 1.073 billion yuan, respectively. Considering that the company's net profit due to changes in fair value and net income from investment due to changes in the stock price of the subsidiary in 2023 was 0.31 billion yuan, and the corresponding earnings were negative due to the reduction in the subsidiary's stock price in the first half of 2024, which affected the company's net profit expectations for the whole year, but the company's net profit deducted from the mother in 2024 is still expected to continue to grow, and the strategic cooperation between the company and China Mobile is progressing steadily, maintaining a “buy” rating.

Risk warning: Strategic cooperation with China Mobile fell short of expectations; R&D and promotion of emerging businesses fell short of expectations; demand from downstream customers fell short of expectations; market competition intensified.