Incident: Recently, the company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved revenue of 64.991 billion yuan, +6.06% year on year; net profit to mother of 8.108 billion yuan, -8.40% year on year; net profit without return to mother of 8.151 billion yuan, -3.67% year on year; in the third quarter of 2024, the company achieved revenue of 23.782 billion yuan, +0.33% year on year, +1.67% month on month; net profit to mother of 3.044 billion yuan, -13.37% year over year, -3.32% month on month; net profit after deducting non-return to mother was 2.908 billion yuan, up -15.11% year over year, -16.50% month on month.

Key points of investment:

Revenue growth has slowed, and gross margin has remained stable. Due to factors such as weak demand in the domestic market, negative growth in SMBG business, and a slowdown in the growth rate of overseas main and innovative businesses, the company's revenue for the third quarter of 2024 was basically flat year-on-year. The company achieved gross margin of 44.76% in the first three quarters of 2024, down 0.09% year on year; 24Q3 gross margin was 44.25%, down 0.07% year on year, down 0.26% month on month, and gross margin basically remained stable; the company achieved net interest rate of 13.71% in the first three quarters of 2024, down 1.79% year on year, and net profit margin for 24Q3 was 13.74%, down 2.05% year on year, down 0.87% month on month. In terms of expenses and expenses, cost growth slowed in the third quarter of 2024, and sales expenses, management expenses, and R&D expenses remained stable compared to the second quarter, showing good cost control effects and relatively stable personnel size. In terms of exchange, exchange losses in the first three quarters of 2024 totaled 0.21 billion yuan, and exchange losses in a single quarter of the third quarter were about 0.13 billion yuan, while exchange earnings for the first three quarters of 2023 were about 0.105 billion yuan.

As companies' demand for digitalization continues, PBG's business resumed growth. In terms of the three major domestic industries, the EBG business helps industry customers promote digital transformation. Despite weak demand in the domestic market, digital demand for corporate cost reduction and efficiency is still active, and EBG's business revenue in the third quarter of 2024 maintained a slight year-on-year increase; by industry, smart buildings continued to grow negatively, and industrial enterprises were affected by the slowdown in investment and production expansion in the photovoltaic, lithium battery, automobile and other industries. Other industries such as petrochemical coal, culture, sports and health, education and teaching, electricity, finance, smart commerce, steel and non-ferrous metals continued to grow. As businesses such as water conservancy and water services, disaster prevention and relief, and emergency management continue to be supported by treasury bonds, funding sources are guaranteed, driving the PBG business to resume positive revenue growth in the third quarter of 2024; with the accelerated issuance of special bonds, the PBG business is expected to gradually pick up. SMBG mainly targets small and medium-sized enterprises. SMBG's negative growth in the third quarter was obvious. The company took the initiative to reduce dealers' inventory and reduce the financial pressure on dealers' inventory; once SMBG's overall industry inventory is reduced, it will increase the flexibility of business development.

Overseas business and innovative business continued to grow, but the growth rate has slowed. In terms of overseas business, growth continued in the third quarter of 2024, but the growth rate slowed. The revenue of the four major business centers grew positively. Among them, the Middle East and Africa business centers grew rapidly, and countries such as the United States and Canada continued to grow negatively; the company has a strong global marketing network, outstanding competitiveness in products and solutions, and overseas business will still have broad room for development in the long term. In terms of innovative business, due to the influence of domestic demand, the growth rate in the third quarter of 2024 declined compared to the first half of the year, and businesses such as Weiying, automotive electronics, and fire protection grew faster; the company's innovative business and Hikvision's main business have formed effective technical collaboration and business collaboration, which has become a support driving the company's business growth, and will form joint efforts in developing digital business scenarios in the future.

The company has been deeply involved in the field of AI for many years, and big models help AI applications continue to be implemented. On October 24, 2024, Hikvision and the National Energy Group released the “Fused Spectral Rapid Test Technology”. Through a series of core technologies such as multi-dimensional sensing, dual-modal neural network algorithms, and AI models, the technology can detect indicators such as calorific value, moisture, sulfur content, and ash content of coal in real time, successfully reducing the time required for coal quality testing from at least 8 hours to 2 minutes; the release of this technology marks the entry of China's coal quality inspection technology into a new era of artificial intelligence. Hikvision began deploying AI technology in 2006. After years of continuous investment and R&D innovation, the company has established a deep accumulation in the AI field; the company's Guanlan model is divided into a three-level architecture of basic models, industry models, and task models. It has four core advantages: rich modal data, professional industry capabilities, high deployment cost ratio, flexible and efficient application. The big model will better help achieve the continuous implementation of AI applications.

Profit forecasting and investment advice. Due to relatively weak domestic market demand, we lowered our 24-26 profit forecast. We expect the company's 24-26 revenue to be 94.097/105.629/119.433 billion yuan (original value was 98.681/112.045/128.119 billion yuan), and 24-26 net profit to mother is 13.76/16.064/18.573 billion yuan (original value was 16.895/19.657/23.238 billion yuan). The corresponding EPS was 1.49/1.74/2.01 yuan, and the corresponding PE was 20.77/17.79/15.39 times, maintaining the “buy” rating.

Risk warning: Industry competition increases risk; downstream demand falls short of expected risk, project progress falls short of expected risk; geopolitical conflict increases risk; progress in technology research and development falls short of expected risk.