The company disclosed its 2024 three-quarter report: revenue for the first three quarters of 64.99 billion yuan (YoY +6.1%), net profit to mother of 8.11 billion yuan (YoY -8.4%), deducting non-net profit of 8.15 billion yuan (YoY -3.7%). Among them, 24Q3's quarterly revenue was 23.78 billion yuan (YoY +0.3%), net profit attributable to mother was 3.04 billion yuan (YoY -13.4%), after deducting non-net profit of 2.91 billion yuan (YoY -15.1%). Third-quarter results fell slightly short of our expectations.

Domestic demand was weak, and the company took the initiative to reduce inventory of dealer partners, putting pressure on Q3 revenue, but it still showed strong resilience. By sector: 1) PBG's 24Q3 revenue growth rate has been corrected, and the share of PBG in areas supported by treasury bonds, as well as traffic management and government governance, which are highly related to digital governance, continues to increase. After the speed of issuance of special bonds is accelerated, it is expected to drive a further recovery in demand. 2) EBG 24Q3 revenue increased slightly year-on-year, and investment in downstream industries slowed overall, especially in the smart building sector. However, the demand for digitalization, which aims to reduce costs and increase efficiency for enterprises, is still active. 3) The negative increase in SMBG24Q3 revenue was obvious. The company took the initiative to reduce the inventory of dealer partners, taking into account weak social demand and tight capital; however, after SMBG's overall industry inventory decreased, it increased the flexibility of business development. 4) Revenue from major overseas businesses continued to grow in 24Q3, but the growth rate slowed. Among them, business centers in the Middle East and Africa are growing rapidly, while countries such as the United States and Canada continue to experience negative growth. The company is also shifting from products to project-based sales overseas, and the share of project revenue continues to rise. 5) Revenue from the innovative business 24Q3 continued to grow but the growth rate slowed. Among them, businesses such as Weiying, automotive electronics, and fire protection grew rapidly.

Gross margin is stable, and cost growth is slowing down. The 24Q3 gross profit margin was 44.25%, -0.07pct year on year. The company still maintained a good gross margin level in an environment where demand was weak. Sales/management/R&D expenses increased 11.0%/3.6%/5.2% year-on-year respectively in 24Q3, and the growth rate was significantly narrower than in the previous quarter. Considering that the company actively optimizes staffing, the subsequent cost growth rate is expected to remain low, once demand improves and revenue growth increases, profit flexibility is considerable.

Investment analysis: Considering the company's active inventory removal operation on SMBG and weak domestic demand in the short term, we have slightly lowered our revenue forecast. Based on this, we estimate that the company's net profit forecast for 2024-2026 will be 13.6/17.1/20.1 billion yuan (the original forecast value was 14.8/17.5/20.3 billion yuan), and the corresponding PE will be 21/17/14x, respectively. Looking ahead to next year, on the one hand, after completing SMBG inventory removal and staffing optimization, the company will go into battle lightly; on the other hand, macro-support policies will be introduced one after another, and fiscal pressure will ease, which is expected to drive a significant recovery in demand. We believe that the period of maximum macroeconomic pressure has passed, and subsequent performance can be expected to improve quarter by quarter. Maintain a “buy” rating.

Risk warning: 1) the risk of the global economic environment and geopolitics; 2) the risk of structural transformation of the domestic economy; 3) the risk of technological upgrading.