Incident: The company released its 2024 semi-annual report. H1 achieved operating income of 3.692 billion yuan, -18.02% year-on-year; net profit to mother of 0.341 billion yuan. Gross profit margin 63.40%, +2.64pct year over year. Single Q2 revenue was 1.972 billion yuan, YoY -22.27%, net profit to mother -0.232 billion yuan, gross profit margin 64.13%, +5.48pct YoY. The R&D expense rate/management cost rate/sales expense ratio were 41.05%/8.81%/26.32%, respectively, and R & D/management/sales expenses were -2.83%/-3.80%/+2.94%, respectively.

The year-on-year decline in the company's H1 revenue was mainly due to a decline in revenue from the digital security business and smart hardware business. In the digital security business, acceptance of H1 urban security projects decreased, and digital security business revenue decreased by 0.444 billion yuan year on year; H1 smart hardware business decreased by 0.311 billion yuan year on year, mainly due to companies continuing to streamline SKU strategically abandoning low-profit businesses and switching to hardware+cloud service sales. The net profit loss due to the decline in revenue was mainly due to relatively rigid expenses (mainly personnel remuneration), and continued high investment in R&D.

AI members' willingness to pay increased significantly, and in August 360AI Search became the world's largest AI-native search engine. 2024H1 achieved a total revenue of 2.625 billion yuan in Internet commercialization and value-added services, or -2.09% over the same period last year. Among them, revenue from the Internet advertising and service business was 2.036 billion yuan, -6.06% year on year; revenue from the Internet value-added business represented by games and Internet products was 0.589 billion yuan, +14.67% year over year. Among them, the revenue of all Internet products was 0.148 billion yuan, +110.45% over the same period, which has already surpassed the revenue of 0.138 billion yuan for the full year of 2023; the number of visits to AI applications represented by “360AI Search” and “360AI Browser” is growing rapidly. According to the latest Similarweb statistics, the number of visits to “360AI Search” in August was close to 0.17 billion, making it the world's largest AI native search engine. With the gradual advancement and maturity of its business model exploration, it is expected to become a new growth pole for the company in the field of Internet commercialization.

H1 achieved safety and other related revenue of 0.464 billion yuan, a year-on-year decrease of 48.95%, mainly due to reduced acceptance of urban safety projects in the first half of the year. The company's security business is mainly divided into government enterprises and urban projects, targeting government and enterprise customers. 360 digital security business has fully blossomed in the fields of finance, government, energy, medical care, education, manufacturing, scientific research, etc. Secure cloud privatization is deployed to achieve continuous service and annual repurchase for major customers in the industry. The confirmed amount of H1's SaaS “secure subscription” service increased by more than 50% year-on-year, effectively increasing the gross profit margin of the security business.

Profit forecast: The company's net profit for 2024/2025/2026 is expected to be 0.045/0.238/0.313 billion yuan, with a “buy” rating.

Risk warning: Industry development, company business progress, profit forecasts and valuations fall short of expectations.