Key points of investment:

Downstream demand recovered slowly, and third-quarter results were under pressure in the short term

The company released its three-quarter report for 2024. The first three quarters of 2024 achieved operating income of 64.991 billion yuan, a year-on-year increase of 6.06%; net profit to mother was 8.108 billion yuan, a year-on-year decrease of 8.4%; net profit after deducting non-return to mother was 8.151 billion yuan, a year-on-year decrease of 3.67%.

In Q3 alone, 2024Q3 achieved operating income of 23.782 billion yuan, a year-on-year increase of 0.33%; net profit to mother was 3.044 billion yuan, a year-on-year decrease of 13.37%; net profit after deducting non-return to mother was 2.908 billion yuan, a year-on-year decrease of 15.11%.

The revenue growth rate of PBG in a single quarter was corrected, and it is expected that in the future, as fiscal policies are implemented, the company PBG/EBG achieved positive growth in the third quarter. Among them, PBG's revenue structure continued to be optimized, water conservancy, disaster prevention and relief, emergency management and other businesses continued to be supported by treasury bonds, and related businesses continued to grow, while traffic management and government governance services that are highly related to digital governance continued to increase in the share of PBG. SMBG experienced a marked decline due to inventory removal, which had a certain impact on the company's overall revenue growth in Q3. In the future, after SMBG's overall industry inventory is reduced, it is expected to increase the flexibility of business development.

Looking forward to the future, considering a series of fiscal policies supporting the resolution of hidden local debt and the stabilization of the real estate market, we expect the company's main business to continue to recover and improve, leading to profit-side recovery.

The digital transformation benchmark project continues to be implemented, and the National Energy Group and the National Energy Group released a new rapid inspection technology company officially released the “integrated spectral rapid detection technology for coal quality” jointly developed with the National Energy Group on October 24. In order to solve the pain points of low efficiency, high risk, and high cost of traditional chemical coal testing, the company and the National Energy Group have been developing a rapid spectral coal quality testing technology route since 2021, using a series of autonomous core technologies such as multi-dimensional sensing, bimodal neural network algorithms, and AI models to achieve real-time, online, and non-destructive testing of large quantities of coal samples. It only takes 2 minutes to obtain test results for sampled coal. Compared with the traditional 8-hour inspection cycle, the company has greatly improved. In the future, this technology is expected to be applied on a large scale in the entire industrial chain such as coal, electricity, chemicals, and transportation, forming one of the driving forces for the growth of the EBG business.

Profit forecasting and valuation analysis

Considering the slow recovery in downstream demand in the first three quarters, we adjusted our previous profit forecast and predicted that the company's revenue for 2024-2026 would be 95.158, 106.96, 121.029 billion yuan, and net profit of 14.142, 16.755, and 20.462 billion yuan. Considering that fiscal policy is expected to drive the gradual recovery of the company's performance in the medium to long term, we remain optimistic and maintain a “buy” rating in the future.

Risk warning

The macroeconomic growth rate fell short of expectations; the implementation of the company's artificial intelligence, big data and other technology applications fell short of expectations; as the company's layout for the intelligent IoT market intensified, the market competition it faced intensified; European and US sanctions intensified, causing the company's overseas business growth to fall short of expectations.