Event: On August 29, 2023, China Software released its 2024 mid-year report. In 2024 H1, the company achieved revenue of 1.984 billion yuan, a year-on-year decrease of 21.73%; net profit to mother -0.273 billion yuan, a year-on-year increase of 47.09%; net profit after deducting non-return to mother -0.286 billion yuan, a year-on-year increase of 45.00%. The results are in line with market expectations.

Key points of investment

Cost reduction and efficiency increased profits, and gross margin improved markedly: in 2024, the company's net profit to mother and net profit after deducting losses decreased year-on-year, mainly due to focusing on the main business, increasing gross margin of newly signed contracts, strengthening product competitiveness, and continuing to promote cost reduction and efficiency, and a decrease in costs and expenses. In 2024 H1, the company's gross margin was 44%, an increase of 8 pcts over the previous year. This was mainly due to a decrease in business volume in the current period, and the independent software product business with high gross profit accounted for a relatively high share. In terms of operation management, management expenses and operating expenses decreased by 24.23%/11.57%, respectively. R&D expenses decreased by 30.71% year-on-year due to personnel optimization and adjustment in this period.

Kirin Software's revenue and profit both increased, and its leading position in domestic production was stable: in 2024, the company's subsidiary Kirin Software achieved revenue of 0.498 billion yuan, an increase of 14% over the previous year, and net profit of 0.121 billion yuan, an increase of 5% over the previous year. Youshang Tongxin Software's 2024H1 revenue was 0.192 billion yuan, up 12% year on year; net profit was 0.139 billion yuan. Kirin Software remains the leading domestic operating system. According to Cidi consultant statistics, Kirin OS has been ranked the number one Linux market share in China for 13 consecutive years. From incremental to quality improvement in ecological construction, Kirin Software continues to contribute to independent open source, donating OpenKylin to the Open Atom Open Source Foundation. As of 2024 H1, the company has established cooperative relationships with 0.0255 million ecosystem vendors to promote the construction of a high-quality operating system ecosystem.

Dameng Data's performance was impressive, and profitability was further improved: in 2024, H1 achieved revenue of 0.352 billion yuan, a year-on-year increase of 22%; net profit to mother was 0.103 billion yuan, an increase of 41% year on year; net profit after deducting non-return to mother was 0.095 billion yuan, an increase of 43% year on year. The performance exceeded the upper limit of the company's previous guidelines.

In 2024 H1, the company's profit growth rate was higher than the revenue growth rate, and the net interest rate increased by 3.47 pct year on year. Mainly, gross margin was 97%, up 1.41 pct year on year; sales expenses ratio was 39%, down 3.16 pct year on year. The company's operating cash flow decreased by 80.16% year on year, mainly due to an increase of 0.054 billion yuan in employee remuneration and 0.019 billion yuan in related taxes and fees.

Profit forecast and investment rating: Party and Government Xinchuang are expected to restart, and there is plenty of room for future flexibility. At the same time, the overall target position of the Party and Government Credit Innovation section is relatively low. Based on this, we recommend the Party and Government Credit Innovation sector opportunities. As a leading domestic OS, China Software also holds shares in Dameng Data, which is the core beneficiary target of Party, Government, and Xinchuang. Based on this, we maintain China Software's 2024-2026 net profit forecast of 0.157/0.345/0.608 billion yuan, maintaining a “buy” rating.

Risk warning: Policy progress falls short of expectations; technology research and development falls short of expectations; industry competition intensifies.