Revenue fell 28.7% year over year in the first half of the year and 47.5% in the second quarter. The company released the 2024 semi-annual report, with 1H24 revenue of 0.22 billion yuan (YoY -28.68%), of which 2Q24 revenue was 0.1 billion yuan (YoY -47.53%, QoQ -17.01%); on the one hand, the revenue reduction was affected by the macroeconomic environment, the e-government market, and some important customers in the industrial control sector where the company had traditional advantages, and on the other hand, as the competitiveness of Longchip products improved, chip sales revenue increased accordingly. The company adjusted its sales strategy and reduced the overall model Sale of solutions.

Net profit for the first half of the year was under pressure. 1H24 net profit to mother - 0.238 billion yuan (loss of 0.134 billion yuan compared to the same period of the previous year), net profit of non-return to mother - 0.26 billion yuan (loss of 0.085 billion yuan over the same period of the previous year). Net profit for 2Q24 -0.163 billion yuan (0.131 billion yuan higher than the same period last year, 0.088 billion yuan higher than the previous quarter), net profit less than 0.179 billion yuan after deducting non-attributable net profit of 0.179 billion yuan (loss of 0.099 billion yuan over the same period of the previous year and 0.098 billion yuan higher than the previous quarter).

Gross margin declined in the first half of the year. The company's 1H24 gross profit margin was 29.67% (YoY -6.24pct), of which 2Q24 gross profit margin was 28.38% (YoY -6.83pct, QoQ -2.36pct); the decline was mainly due to the high gross profit contribution of the industrial control business in the same period last year, and the revenue and gross margin of the industrial control business declined this year; as sales of information technology chips picked up, the gross margin of the information technology business showed an upward trend; the gross margin of the solution business was related to the product structure, and the gross margin increased year-on-year.

Chip revenue increased year-on-year for two consecutive quarters, and sales of solutions declined due to strategic adjustments. The company's 1H24 chip product revenue totaled 0.163 billion yuan, and chip sales revenue increased year-on-year for two consecutive quarters, including industrial control chip revenue of 0.054 billion yuan (YoY -51.86%), gross profit margin of 52.47%; information technology chip revenue of 0.109 billion yuan (YoY 186.98%), which already surpassed last year's annual information chip revenue, with a gross profit margin of 21.55%. As chip sales gradually picked up, the company adjusted its sales strategy and reduced overall model solution sales. Solution revenue was 0.056 billion yuan (YoY -64.14%), and the gross profit margin was 23.42%.

The field of information technology has improved the cost performance ratio of products, and a new generation of products has entered the small-batch stage of the market. In terms of desktop CPUs, with the launch of the Longxin 3A6000, related solutions were launched one after another and entered the small-batch promotion stage; in terms of server CPUs, downstream manufacturers are supported to complete the development of Longxin 3C5000/3D5000 dual-socket and four-socket servers and enter the marketing stage. In addition, the development of Dragonchip's first standalone graphics card/AI accelerator chip, 9A1000, is already in full swing.

Investment advice: Adjust profit expectations and maintain a “better than the market” rating. We believe that the company's business will gradually improve due to cyclical changes in the industry. New information chip products will bring growth momentum for desktop products, but short-term performance may continue to be pressured; therefore, to adjust profit expectations, the company's 2024-2026 operating income is expected to be 0.604/0.936/1.296 billion yuan (previous value 0.705/1.014/1.36 billion yuan), and net profit of 0.156/0.001/0.095 billion yuan (previous value -0.099/0.03/ 0.122 billion yuan), corresponding PS is 62.3/40.2/29.0 times, respectively, maintaining the “superior to the market” rating.

Risk warning: downstream demand falls short of expectations; risk of policy market changes; risk of market competition, etc.