Matters:

The company released its 2024 semi-annual report. In the first half of 2024, it achieved operating income of 0.173 billion yuan, a year-on-year increase of 39.47%; net profit to mother of 0.007 billion yuan, an increase of 198.42% over the previous year; after deducting non-net profit of 0.006 billion yuan, an increase of 167.44% year-on-year. In Q2 2024, revenue was 0.118 billion yuan, up 73.49% year on year, and net profit to mother was 0.003 billion yuan, up 151.28% year on year.

Commentary:

The main business has steadily achieved steady growth, and the strategic transformation has begun to bear fruit. 2024H1 signed a new contract amount of 0.248 billion yuan, an increase of more than 80% over the previous year. It undertook a number of digital information construction projects. By quickly responding to customer needs, accelerating the smooth implementation of projects and continuously improving execution efficiency, the project delivery schedule is in line with expectations. The company has stepped up its efforts to collect accounts receivable, and the repayment rate for long-time accounts has been significantly improved.

As a result, the company's profit margin has steadily returned to a normal level, laying a solid foundation for the company to achieve its annual operating goals. The company's strategic transformation from a project integration company to a software product company vigorously promoted pure software product sales and optimized the business and revenue structure. The company's new software project contracts and operation and maintenance service contracts increased dramatically over the same period last year, and the business transformation was beginning to bear fruit. The company established new branches in Sichuan and Shaanxi, steadily promoted the business development plan for the national market layout, opened up empty incremental markets in an orderly manner, and gradually constructed a new pattern of “regional branches seize new markets and professional subsidiaries enter a new track”.

Improve the quality of operations and enhance technological innovation capabilities. 2024H1 gross margin was 25.53%, +5.74pct; in terms of cost ratio, sales, management, and R&D expenses were 7.50%, 7.72%, and 10.39%, respectively, and -3.11pct, -2.19pct, and -1.12pct, respectively. 2024H1's R&D investment is mainly used for: 1) Security upgrades for video surveillance products: Relying on the domestic chip architecture, closely revolving around GB35114-2017 public safety video surveillance network information security technology requirements, the video surveillance products were comprehensively upgraded to ensure the integrity and security of video data; 2) Breakthrough and application of the big visual model: the company successfully launched the “Zhizhou ALL Algorithm Engine”, which has the ability to efficiently process visual information from various channels; 3) Deepening industry application of big data technology: the company's functions and performance of modeling platforms In-depth optimization and refinement have been carried out to more accurately process complex data related to public security scenarios.

The promotion of public safety video coding and decoding standards is being accelerated, and forward-looking layouts seize development opportunities. On March 26, 2024, the “Action Plan for Implementing the 'National Standardization Development Outline' (2024-2025)” proposed the implementation of the Public Safety Standardization Foundation Project, marking that GB35114 “Technical Requirements for Public Safety Video Surveillance Network Information Security” and the SVAC3.0 codec standard will enter the fast track. The company is committed to becoming an industry-leading digital governance and public safety integrated service operator. By continuously consolidating its leading position in core technology and actively grasping digital innovation trends, the company applies advanced multi-modal large model technology and industry-leading machine vision AI technology to various scenarios such as social governance and public safety, continuously expanding the differentiated competitive advantages of the company's products and services, and enhancing the company's market share and brand influence.

Investment advice: With the accelerated introduction of China's public security video coding and decoding standards, the company is expected to benefit. We expect revenue for 2024-2026 to be 0.408/0.467/0.519 billion yuan, corresponding growth rates of 86.2%/14.3%/11.1%, respectively; net profit to mother 0.013/0.019/0.026 billion yuan, corresponding growth rates of 112.4%, 52.3%, and 34.0%, respectively. Maintain a “neutral” rating.

Risk warning: Market competition intensifies, policy progress falls short of expectations, product development falls short of expectations.