The scope of the 24H1 consolidation of completed asset purchases increased, and revenue increased dramatically. 2024H1 revenue was 12.526 billion yuan, +45.98% year over year; net profit to mother -0.154 billion yuan, -176.17% year over year; deducted non-net profit -0.21 billion yuan, -247.04% year over year. From the end of 2023 to the beginning of 2024, the company continued to promote asset purchases. As of the 2024 mid-term report, the company had completed the registration procedures for share transfers and changes in Tongfang Computer Co., Ltd. and Zhitong International Information Technology Co., Ltd. 2024Q2 revenue was 7.076 billion yuan, +61.66% year over year; net profit to mother was 0.123 billion yuan, -13.25% year over year; after deducting non-net profit of 0.074 billion yuan, -30.90% year over year.

By business breakdown, calculate product and digital infrastructure 2024H1 revenue of 3.91 billion yuan, accounting for 31.22%, gross profit margin of 6.38%; software and digital technology services revenue of 8.513 billion yuan, -0.77% year-on-year, accounting for 67.97%, gross profit margin of 15.28%.

Facing challenges and opportunities for change, the company's strategy is clear to ensure business competitiveness. ① In terms of software and digital technology services, 2024H1 maintains a leading share of core major customer businesses in key industries such as ICT, finance, Internet, and operators, and is a global strategic supplier for a large ICT leading enterprise. The company continues to strengthen its professional consulting capabilities. In the “2023-2024 China IT Service Market Research Annual Report” published by CCID Consulting, Softcom Power ranked first among domestic manufacturers in the IT consulting market. ② In terms of computing products and digital infrastructure services, 2024H1 has won a total of nearly 30 iconic computing product projects, ranking first in the industry. In terms of basic software, the company has comprehensive capabilities of “open source Hongmeng industrialization” and “industrial open source Hongmeng”, and has pioneered interconnection with HarmonyOS to create demonstration cases of industrial Hongmeng in various projects. Softcom Power has accelerated the integrated development of basic software and hardware, and accelerated the development process of domestic AIPC, Hongmeng PC and other products and solutions. ③ For the consumer terminal market, the smart electronics segment is independently operated by its subsidiary Zhitong International. In the first half of 2024, Zhitong International launched various best-selling products such as the Mechanical Revolution Pterosaur series, Yoshi series, Aurora X, and Unbounded X series, and was the first to release AIPC; its computer ODM business covered 30+ customers in over 18 countries in Asia Pacific, Europe, and Latin America. ④ In the digital energy and intelligent computing service sector, Softcom Power promotes business development through deepening industrial cooperation. It has successively established Liaoning Softcom Intelligent Computing Technology Co., Ltd. and Softcom Intelligent Computing Technology (Guangdong) Group Co., Ltd. to provide integrated investment, construction and operation services using a joint venture model.

Adjust the structure, resist risks, speed up overseas construction, and improve business conditions. ① Affected by a series of factors such as increased competition in the industry, declining customer prices, and rising labor costs, the company's profit was under year-on-year pressure in the first half of 2024. In order to meet the challenges of changes in the external environment, the company adjusted its strategy, sought development, adjusted its structure, resisted risks, and took active measures to improve business conditions. ② In the international business sector, Softcom has accelerated the construction of overseas operating systems and promoted the globalization of “service delivery+hardware products”. With 2024H1, the company gradually built up an effective marketing and delivery team overseas, and carried out both overseas and local development to steadily advance business in North America and Japan, and accelerate business layout and development in Southeast Asia and the Middle East. In the Southeast Asia region, Softcom Power established new companies in Indonesia and Thailand, and successfully won a bid for a long-term ODC offshore development center project for a Singaporean multinational transportation group in May 2024. In the Middle East region, Softcom Power signed a memorandum of understanding with a major ICT leader in Saudi Arabia to launch cooperation between the Middle East and Central Asia in March 2024 to jointly deepen the ecosystem and partner business cooperation in the Middle East and Central Asia. In Turkey, the number of major customers and business scale of Softcom Power is growing steadily, and it has established long-term cooperative relationships with many large local enterprise groups in the development and operation of digital transformation applications. The company's Zhitong International “Mechanical Revolution” hardware sales have achieved breakthroughs in Kazakhstan and Germany.

Softcom Power increased its capital and acquired 100% of the shares of Tongfang Computer and Tongfang International. ① On November 10, 2023, Softcom Power announced that the company plans to increase the capital of its subsidiary Softcom Intelligent Computing by 2.8 billion yuan to acquire 100% of Tongfang Computer, 100% of Tongfang International, and 51% of Chengdu Wisdom through listing and sale.

Tongfang Computer and Tongfang International are both server/PC manufacturers and consumer electronics and ODM manufacturers. They are one of the core assets of the listed company Tongfang Shares. According to the announcement, Tongfang Computer's transfer price was 1.355 billion yuan, Tongfang International's transfer price was 0.544 billion yuan, Chengdu Wisdom 51% equity transfer price was 0 yuan, and the total combined transaction amount of the three items was 1.899 billion yuan. After the acquisition was completed, Tongfang Computer changed to Softcom Computing, and Tongfang International became Zhitong International. ② According to Softcom's official account data, Tongfang Xinchuang's comprehensive market share ranked in the top three for three consecutive years in 2020-2022. Tongfang International owns the consumer computer brand Mechanical Revolution. According to data from the company's Station B Mechanical Revolution notebook column, the company's game book sales exceeded one million from January 1, 2023 to Double Eleven. ③ Tongfang Computer's 2022 revenue was 4.03 billion yuan, loss 0.1 billion yuan, 2023 semi-annual revenue of 1.64 billion yuan, loss 0.06 billion yuan; Tongfang International's 2022 revenue was 5.46 billion yuan, loss 0.1 billion yuan, and semi-annual revenue of 2023 was 3.57 billion yuan, and net profit was 28 million yuan.

Cloud edge AI capabilities are gradually being perfected, and AIPC is showing the Artificial Intelligence Conference. ① Relying on the end-to-end computing power advantages of CPU+GPU+NPU formed by the high-performance terminal of Mechanical Revolution under Tongfang International, combined with the cloud computing power of the company's intelligent computing center and the cloud-side ecosystem formed by the Softcom Tianxuan 2.0 MaaS end-side AI model, it further laid out AIPC infrastructure and ecological development, developed personalized, lightweight, and branded AI smart assistants for young people in the new era, and initially formed an AI application ecosystem. It further targets AIPC segments to create themed scenarios covering programmers, entertainment, e-sports, work meetings, and meetings A high-performance mobile terminal for research and many other scenarios. ② On July 4-6, at the 2024 World Artificial Intelligence Conference, Softcom presented the latest AI terminal products, AI workstations, and intelligent computing power products at the conference. These include the AIPC Chaoxiang Z8000, the green AI all-in-one computer surpasses the A7000, and the AI workstation Super Xuan 1600, the super powerful A800IAI inference server, and the super powerful K620V4+ server. ③ The mechanical revolution brought the Yoshi and Pterosaur series high-performance gaming books equipped with GeForcertX40 series laptop GPUs. The Unbounded 14X lightweight laptop and iMiniPro 820 mini console using the Ryzen 78845HS processor with a next-generation AI processor were also unveiled at this exhibition.

The company achieved full-stack coverage of the Hongmeng ecosystem, and Hongmeng's business progressed smoothly. ① The company continues to invest in basic software product development and the construction of technical capabilities. It fully revolves around the “operating system+southbound ecology+northbound ecology” full-chain system, and has achieved full-stack coverage of the Hongmeng ecosystem, relying on various core elements such as Hongmeng operating system, Hongmeng native application, Hongmeng Yuan service, and Hongmeng Zhilian. ② In terms of open source Hongmeng, the company's subsidiary Honghu Wanlian has developed its own brand SwanLinkOS, released 3 industrial commercial distributions and 10+ development kits, and completed the Hongmeng adaptation of 50+ commercial devices with 30+ ecological partners, and achieved commercial implementation in various fields such as commercial display, mining, transportation, education, and energy (electricity). Recently, Honghu Wanlian released SwanLinkOS5 (Tianhong Operating System) and joined forces with Softcom Computing (Tongfang Computer) to strongly launch next-generation smart products such as open source Hongmeng AIPC and smart interactive tablets equipped with SwanLinkOS5. ③ At the same time, as the first batch of project co-construction units of the OpenHarmony Device Unified Interconnection Technical Standard Preparation Group, the company took the lead in achieving interconnection with HarmonyOS and created demonstration cases of industrial harmony in multiple projects. The company reached a strategic cooperation with the Ordos Industrial Internet Platform and won the first batch of Kuanghong OSV partner awards from a leading ICT enterprise in China, deepening the layout of 20+ Kuanghong innovation scenarios; reached a strategic cooperation with Xiongan Unicom to build a benchmark project for the “Chenganhong” Park; successfully won the bid for China Southern Power Grid's data acquisition device research and development project, and completed the OpenHarmony adaptation of various power equipment to create a model case for energy industry harmony.

Profit forecasting and investment advice. The company is a core service provider in the autonomous and controllable field, providing Xinchuang products and full-stack technology services. We believe that the company's strategic digital business and emerging businesses can benefit from the “digital China” and “digital economy” national development strategies. At the same time, the company is also actively developing new fields such as AIGC and AIPC, and has in-depth cooperation with major domestic model manufacturers. We expect the company's net profit to be 6.55/7.88/9.24 yuan for 2024-2026, and 0.69/0.83/0.97 for EPS, respectively. We use the segmented valuation method.

Risk warning: Economic recovery falls short of expectations, corporate strategic transformation falls short of expectations, insufficient downstream demand, increased industry competition, etc.