Matters:

The company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 0.421 billion yuan, a year-on-year decrease of 8.00%, and realized net profit to mother of 0.101 billion yuan, a year-on-year decrease of 15.60%. The company also issued an announcement on the 2024 mid-term cash dividend plan, which will distribute a cash dividend of 2 yuan (tax included) for every 10 shares to all shareholders.

Ping An's point of view:

The company's revenue growth is still under pressure, and mid-term dividends strengthen shareholder returns. In the first three quarters of 2024, the company achieved revenue of 0.421 billion yuan, a year-on-year decrease of 8.00% (vSYoY -4.93%, 24H1). Looking at a single quarter, the company achieved revenue of 0.154 billion yuan in the third quarter, a year-on-year decrease of 12.88%. We believe that the company's revenue growth is still under pressure because it is still affected by market environment factors. On the profit side, the company achieved net profit of 0.101 billion yuan in the first three quarters, a year-on-year decrease of 15.60% (VSYoY -21.11%, 24H1), and the decline narrowed somewhat. The company also issued an announcement on the 2024 mid-term cash dividend plan, distributing a cash dividend of 2 yuan (tax included) to all shareholders for every 10 shares, with a total dividend of 41.08 million yuan (accounting for more than 40% of net profit returned to mother for the first three quarters).

Gross margin remains stable, and R&D investment continues to be increased to enhance competitiveness. The company's gross margin for the first three quarters of 2024 was 70.58% (vs 70.52%, 23Q1-3), which remained stable. The company's expense ratio for the first three quarters increased by 3.46 percentage points to 52.61% compared to the same period of the previous year. The R&D expenditure rate for the first three quarters increased by 3.49 percentage points to 27.69% over the same period of the previous year, and the management/ sales expense ratio changed +0.26pct/-0.14pct to 16.82%/10.80% over the same period last year, which was relatively stable. The company's net interest rate for the first three quarters was 24.07%, down 2.17pct from the same period last year, but the absolute level remained among the highest in the comparable industry.

The company further deepens cooperation with domestic manufacturers and actively promotes financial credit innovation. On the one hand, the company is actively promoting the deployment of the next-generation core trading system A5. According to the company's “Apex Software” account, since October 2023, A5 has achieved full-stack single-track operation of CPUs, databases, operating systems, middleware, national secrets, etc. at Dongwu Securities, setting a successful benchmark for the industry. Currently, the trading projects currently being implemented by Apex, such as CITIC Securities, Haitong Securities, and Nanjing Securities, all use the “go online and create” plan. On the other hand, the company has further deepened cooperation with Huawei and Tencent Cloud since the third quarter, and continues to explore financial credit innovation cases. On September 6, the company and Tencent Cloud signed a strategic cooperation agreement during the 2024 Tencent Global Digital Ecosystem Conference. The two sides have implemented domestic database applications for nearly 40 financial institutions in the fields of securities and asset management. On October 18, Apex Software officially released the HTS 2X Pure Blood Xinchuang Edition in Beijing, which is an important result of cooperation between the company and Huawei and Tencent Cloud in the field of deep software and hardware integration solutions. We have seen that the company is actively grasping the new needs of customers and further deepening the product layout of Financial Credit Innovation, which is expected to inject momentum into the company.

Profit forecast and investment advice: According to the company's 2024 three-quarter report, we maintain the company's profit forecast. The company's net profit for 2024-2026 is 0.236 billion yuan, 0.293 billion yuan, and 0.367 billion yuan respectively. The corresponding EPS is 1.15 yuan, 1.43 yuan, and 1.79 yuan, respectively. The PE corresponding to the closing price on October 29 is 33.1 times, 26.6 times, and 21.3 times, respectively. The company is based on securities IT, and the self-developed “3+1" basic platform consolidates the technical foundation, and is the first in the industry to achieve full-stack Xinchuang adaptation for core transactions. The company's distributed core trading system product implementation progress is ahead of its peers, and the market share of the core trading system is expected to increase further. As Financial Innovation enters the deep-water zone, we believe that in the future, with the support of products such as Apex A5, HTS, and W5, the company's growth space will be further opened up. We are optimistic about the sustainability of the company's performance growth and maintain a “recommended” rating.

Risk warning: 1) Financial credit innovation has fallen short of expectations. If the pace of progress of Financial Credit Innovation to the core system falls short of expectations, it will affect the promotion progress of the company's related products.

2) Capital market reforms have fallen short of expectations. If capital market reforms are not progressing as fast as expected, it will affect customers' system transformation and upgrade needs, and the company's related business growth may fall short of expectations. 3) Financial institutions' revenue growth is under pressure. The company's main customers are financial institutions. If customer revenue growth is under pressure due to factors such as fee reduction and commission reduction policies, it may lead to a tightening of customer information IT expenses, which will affect the company's performance growth.