In the first half of the year, the company's revenue increased 2% year on year to 14.9 billion yuan; net profit to mother fell 8% year on year to 1.81 billion yuan, and net profit after deducting non-return to mother increased slightly year on year; gross margin was 41.3%, which has remained stable since 2023; and net cash flow from operating activities was -0.507 billion yuan, better than the average for the same period before the pandemic.

Domestic business revenue was 7.38 billion yuan, down 5% from the same period. 1) Government business-side revenue also fell 15% to 0.8 billion yuan. Local governments are cautious in investing, and demand from traditional industries is slowing down. Ultra-long-term treasury bonds and special funds drive investment in emergency response, transportation and other industries, and Dahua realized business opportunities. Increased policies and faster debt issuance are expected to increase government spending in the future. AI applications have entered a period of diffusion. The Dahuaxing Han University model has completed development in fields such as comprehensive management and public security, and more functions and products will stimulate demand. 2) The enterprise's business-side revenue was 3.9 billion yuan, which was basically the same as the previous year. Industrial and commercial enterprises grew rapidly, the energy sector maintained good development, and the release of digital value in the electricity and coal sectors accelerated, but industries such as construction, culture, education, health, and finance were weak. Advanced methods such as industrial perception, intelligent diagnosis, and data operation and maintenance have become key factors in promoting modern industrial development and healthy enterprise development, and the market prospects are broad. 3) The distribution business was affected by weak market demand and declined slightly. The company continued to optimize the channel ecosystem, increase the launch of new products and load SMB intelligent solutions.

Overseas business revenue also increased 9% to 7.49 billion yuan, accounting for more than 50% of the first time. Among them, major Latin American countries and the greater European region are growing rapidly. Overseas business will continue to focus on declining channels, expand integrator customers, promote safe cities, intelligent transportation, energy, buildings, education and other industry solutions, and expand new businesses such as digital communication, fire, access control, and thermal imaging with great potential. The company will adopt a “one country, one policy” to resolve manufacturing and supply issues.

Revenue from innovative businesses also increased 9% to 2.46 billion yuan. Huarui's business revolves around machine vision and mobile robotics. The first half of the year was carefully influenced by corporate customer investment, and performance was under pressure. In the future, it will strengthen research and development of new products and complement the product line to help Dahua move from the customer's edge system to the core business system. Huaruijie's automotive electronics industry is fiercely competitive. Its front-end products are mainly cameras and millimeter-wave radars, but certification of vehicle specifications for new customers usually takes 1-2 years, and it will still take time and process until new models are mass-produced. Aftermarket products are expected to grow rapidly in the second half of the year using domestic and overseas marketing platforms. The subsidiary Huagan focuses on thermal imaging technology. It participated in several tenders in the emergency industry in the first half of the year. It is expected that more projects will be launched in the second half of the year to support its growth in performance.

We forecast the company's 24-26 earnings per share of 1.06, 1.31, and 1.50 yuan, respectively (the original 24-25 forecast was 1.43 yuan and 1.78 yuan, respectively, which mainly adjusted revenue and some profit and loss items). Based on the 24-year average PE valuation of comparable companies, a target price of 21.20 yuan was given to maintain the purchase rating.

Risk warning

Industry demand falls short of expectations; implementation of AI big models falls short of expectations; overseas business falls short of expected risks.