Incident description:

The company released its 2024 semi-annual report. With 2024H1, the company achieved operating income of 156.38 million yuan, -21.4% year over year, mainly solution business order volume decreased year-on-year; net profit to mother was 25.33 million yuan, or -36.6% year on year; net profit after deducting non-return to mother was 15.89 million yuan, or -53.4% year over year.

Incident reviews:

The pace of implementation of some downstream projects fell short of expectations and increased investment in marketing research and development led to a decline in performance in the first half of the year. Looking at application scenarios, in the first half of the year, the company's smart energy, smart transportation, industrial Internet, smart cities, and other industry sectors achieved operating income of 82.19 million yuan, 30.48 million yuan, 1,466 yuan, 9.44 million yuan, and 19.61 million yuan, respectively, +24.1%, -21.8%, -74.6%, -35.1%, and -8.7% year-on-year respectively.

The large decline in the industrial Internet is mainly due to the slowdown in the implementation of orders for digital transformation solutions in the manufacturing industry. The decline in revenue from smart transportation and smart cities is mainly due to the fact that new rail transit models have not yet been launched, and revenue from urban road traffic management, integrated pipe galleries, etc., and intelligent connectivity projects have not yet been launched. At the same time, the company continued to accelerate R&D and sales team building. In the first half of the year, sales expenses and R&D expenses increased 25.3% and 21.7%, respectively.

Smart energy continues to improve, and a stable business infrastructure is being built. Smart energy mainly includes scenarios such as traditional electricity, photovoltaics, wind power, new energy storage, and smart mining. The company's continuous growth in the smart energy market for many years is mainly due to the increase in the digital construction of domestic power grids, the annual increase in investment in optical storage and charging, and the boom in the smart coal mining industry. The company has built a solid performance base with excellent product strength and a complete customer structure. Among them, the company has initially completed the transformation from digital to digital intelligence in smart mines, leading the market share ranking for many years. Typical projects include Shendong Daliuta Coal Mine, Pingmei Shenma Group Pingyu Coal and Electricity, Zhujidong Mine, and Shenmu Zhangjiamao Mining. In terms of electricity, the company's digital market growth rate in the traditional power industry reached a record high; in the photovoltaic industry, the company's digital market has taken shape and expanded from terminal applications to the midstream; in terms of wind power, the company's market performance has been stable in recent years, forming a high level of recognition; overseas, the digitalization of power grids and investment in new energy projects focuses on the industry, and the company has achieved initial results in Europe and Southeast Asia.

In terms of smart cities, it is expected to benefit from the implementation of the vehicle road cloud project to achieve long-term growth. Urban intelligent connectivity is an area where the company is expected to focus on breakthroughs next year. In early 2024, the “Notice on Launching the Pilot Application of Intelligent Connected Vehicle “Vehicle Road Cloud Integration” was issued, and 20 urban consortia were identified as pilot cities for “vehicle-road cloud integration” applications in July 2024. On the “vehicle” side, the company has delivered in batches in the fields of low-speed driverless driving, unmanned buses, etc., and is expected to take advantage of intelligent connectivity in the “road” aspect, taking the Liuzhou Vehicle Networking Pilot Zone project as an example. The company obtains front-end camera, RSU, radar and other equipment data through industrial-grade Ethernet switches to provide information and services for C-V2X infrastructure and holographic sensing devices (roadside terminals) to enable V2X autonomous vehicles and participants Connected vehicles that drive safely and efficiently Full management.

The smart transportation and industrial Internet sectors are actively transforming into solution providers. In terms of rail transportation, the company already has a full range of communication system solutions, and is leading the market in various segments such as PIS and AFC, and is expected to continue to achieve business breakthroughs through new technologies such as TSN, 5G, artificial intelligence, and industrial digital platforms; in the highway sector, the company invests in R&D resources to integrate design highway products and transform into a joint ecosystem solution provider; in terms of intelligent manufacturing, the company and intelligent manufacturing ecosystem partners have launched manufacturing digital transformation system solutions, providing turnkey projects for owners and integrators, and has been carried out for many regulated enterprises Digital transformation diagnostic services. The company uses the HaaS industrial digitization platform as a starting point to provide customers with industry-leading network management, equipment monitoring, visual operation and maintenance, and information security functions, and is expected to achieve higher value in a single project with technical advantages.

Profit forecasting, valuation analysis and investment suggestions: Overall, we believe that short-term downstream pressure on the industrial Internet, smart transportation, etc., and the increase in R&D and marketing expenses will have a negative impact on the company's performance, but we believe that the company's market position in the smart energy sector is stable. Smart rail transit and car road cloud projects are expected to start in the second half of the year to next year. The company's market development and R&D investment will achieve more positive results, and the valuation is expected to be catalyzed by steady growth policies such as manufacturing, new energy, and road cloud. We expect the company's net profit to be 0.08/0.12/0.17 billion yuan in 2024-2026, respectively, -29.8%/+59.4%/+42.2% year-on-year; downgraded to “Increased holdings -A” rating.

Risk warning: The pace of implementation of the Industrial Internet of Things Haas project fell short of expectations, leading to a sharp decline in revenue; communication products fell short of expectations due to poor progress in the vehicle-road cloud project; smart transportation revenue declined due to poor delivery of new rail transit models; and intense competition in the middle- and low-end product line market led to a decline in overall gross margin.