Hang Seng Electronics achieved revenue of 4.188 billion (yoy -4.12%) in the first three quarters of '24, net profit of 0.446 billion (yoy -26.57%), net profit of 0.267 billion (yoy -50.28%) after deducting non-net profit of 0.267 billion (yoy -50.28%). Among them, Q3 revenue was 1.352 billion yuan (yoy -12.26%), and Q3 net profit to mother was 0.416 billion yuan (yoy +159.18%). Q3 net profit increased year-on-year, mainly due to profit and loss from changes in fair value (such as Starlink Technology) and the increase in investment income due to long-term equity investment. In view of the upward trend in industry demand, we believe Hang Seng's mid-term inflection point has arrived, and the foreign shareholding ratio is gradually increasing to maintain the buying rating.

24Q1-Q3: The revenue level has not improved, and the personnel structure was further optimized. The decline in the company's revenue and net profit due to the first three quarters was mainly affected by shrinking IT demand from downstream customers and slow decision-making processes. The company's overall gross margin for the first three quarters was 69.31%, a year-on-year change of 2.58pct, mainly due to an increase in the share of corporate capital and financial infrastructure business revenue with relatively low gross margin; the sales/management/ R&D expenses ratio was 11.98%/14.71%/40.24%, -0.22pct/+0.95pct/-0.60pct. The Q3 company's personnel structure was further optimized, and the Q4 fee control effect is expected to be further reflected; the net operating cash flow was -0.991 billion, yoy- 27.08%

Revenue structure: Wealth business revenue declined significantly, and asset management business revenue was relatively stable. The company's segmented revenue for the first three quarters: 1) Fortune Technology Services 0.803 billion, yoy -20.32%; 2) Asset Management Technology Services 1.01 billion, yoy -3.40%; 3) Operation and Institutional Technology Services 0.786 billion, yoy -6.54%; 4) Risk and Platform Technology Services 0.309 billion, yoy -2.77%; 5) Data Services 0.248 billion, yoy -0.33%; 6) innovative business 0.374 billion, yoy -0.01%; 7) enterprise finance, insurance core and financial infrastructure technology services 0.47 billion, yoy +16.74%, mainly due to last year's projects confirmed this year.

Hang Seng Electronics: The trend in industry demand is upward, and the mid-term inflection point has arrived. Hang Seng's last round of decline (23.4.4 to 24.9.23) is due to three major factors: 1) The decline in industry demand: factors such as strict financial supervision, fee cuts, and weak capital markets have led to a contraction in IT spending of financial institutions over the past 23 years; 2) increased competition: competition in the core systems of brokerage companies has intensified; 3) continued outflow of foreign capital. We believe that demand in the financial IT industry is trending upward, and Hang Seng's mid-term inflection point has arrived:

First, the improvement in the market will directly drive the revenue of brokerage firms and fund companies to increase IT investment; second, the introduction of policies such as the “Guiding Opinions on Promoting the Entry of Medium- to Long-Term Capital into the Market” indicates that the country is increasing its support for the financial market. Furthermore, the foreign shareholding ratio is gradually increasing, and the shares of the Shanghai Shenzhen Hong Kong Stock Connect have increased from 5.34% (24.4.30) to 6.80% (24.9.30).

Profit forecasting and valuation

In view of improved industry demand and increased investment returns, the company raised its 24-26 profit forecast to 1.624/2.146/2.601 billion (previous value 1.46/1.856/2.151 billion). Comparing the company's 25PE with an average value of 46 times (Wind), we are optimistic about Hang Seng's core competitiveness and give the company a 25-year target PE of 46 times, corresponding to a target price of 52.12 yuan (previous value of 20.81 yuan).

Risk warning: Financial institutions' IT needs fall short of expectations, and industry competition is intensifying.