Incident: The company announced that in the first three quarters of 2024, it achieved revenue of 22.45 billion yuan, +0.77% year on year; realized net profit of 2.545 billion yuan, or -1.74% year on year; realized net profit after deduction of non-return to mother of 2.261 billion yuan, or -5.87% year on year.

There was pressure in the third quarter, and revenue is expected to improve in the fourth quarter: due to poor performance in the domestic market, public security, traffic police, intelligent construction, and finance industries have declined, and the distribution business is also in a period of change. The company achieved revenue of 7.583 billion yuan in the third quarter of 2024, a slight decrease of 0.80% over the previous year.

Affected by weakening environmental demand, the company's gross profit margin for the third quarter was 39.90%, down 0.93 percentage points from month to month. Due to the rapid appreciation of RMB in the short term, the company lost a small amount on exchange during the period. Financial expenses for the third quarter were 8.3 million yuan, affecting the company's profit performance in the third quarter. Net profit attributable to mother in the third quarter was 0.735 billion yuan, up 19.75% year on year. If the impact of non-recurring profit and loss is excluded, net profit without deducting non-recurring profit and loss was 0.499 billion yuan, a year-on-year decrease of 22.91%. Looking ahead to the fourth quarter, the market is picking up, and revenue is expected to improve as superimposed companies have made arrangements in areas such as emergency projects and public livelihood projects.

The policy is expected to have a positive impact on the repayment of existing projects and the promotion of new projects: On October 12, the Information Office of the State Council held a press conference and mentioned “the plan is to increase large-scale debt limits at one time, replace hidden existing debts of local governments, and step up efforts to support local efforts to resolve debt risks. 2024H1, Dahua ToG achieved revenue of 1.768 billion yuan, -15.07% YoY, accounting for 23.95% of domestic business revenue. Debt conversion is beneficial to improving the ability of local governments to invest in the digital economy. Demand for government projects is expected to rise, thereby speeding up the recovery of the company's ToG business, and performance is expected to improve steadily. Furthermore, as of the third quarter of 2024, the company's notes receivable and accounts receivable were $6.08 billion and $17.181 billion, respectively. Local government debt conversion is conducive to improving the recovery of company accounts receivable and recovery of bad debts, thereby improving cash flow levels and increasing operating profits.

Investment advice: The company is improving system capabilities through a small investment, focusing on the digital transformation of the enterprise, gradually deepening from the edge system to the main production system. We expect the company to achieve operating income of 32.991/36.739/41.657 billion yuan and net profit to mother of 3.439/3.901/4.675 billion yuan in 2024-2026. The corresponding PE was 15.75/13.88/11.58 times, respectively, maintaining the “gain” rating.

Risk warning: Client capital recovery falls short of expectations, market competition intensifies, policy implementation falls short of expectations, etc.