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 4.188 billion yuan, a year-on-year decrease of 4.12%, and realized net profit to mother of 0.446 billion yuan, a year-on-year decrease of 26.57%.

Ping An's point of view:

The revenue side is still under pressure, and the decline in profits has narrowed. In the first three quarters of 2024, the company achieved revenue of 4.188 billion yuan, a year-on-year decrease of 4.12% (vSYoY +0.32%, 24H1). Against the backdrop of slowing market demand, Q3 achieved revenue of 1.352 billion yuan (YoY -12.26%), and revenue growth in the third quarter was under pressure. In terms of revenue composition, Fortune Technology service revenue (0.803 billion yuan, YoY -20.32%) was the main influencing factor in revenue decline. At the same time, operating and institutional technology services and asset management technology services achieved revenue of 0.786 billion yuan (YoY -6.54%) and 1.01 billion yuan (YoY -3.40%), respectively.

Meanwhile, corporate finance, insurance core, and financial infrastructure technology services achieved revenue of 0.47 billion yuan, an increase of 16.74% over the previous year, achieving positive growth. In addition, the company's risk and revenue from platform technology services, data service business, and innovation business decreased by 2.77%, 0.33%, and 0.01%, respectively, over the same period last year, which was relatively stable. On the profit side, the company achieved net profit of 0.446 billion yuan in the first three quarters, a year-on-year decrease of 26.57% (VSYoY -93.3%, 24H1), and the decline narrowed somewhat.

The gross margin declined year on year, and the expense ratio was relatively stable during the period. The company's gross margin for the first three quarters of 2024 was 69.31%, down 2.58pct from the same period last year. The company's expense ratio for the first three quarters was 66.83%, which was relatively stable, up 0.32pct from the same period last year. The R&D/sales expense ratio fell 0.60pct/0.22pct year on year to 40.24%/11.98%, respectively, and the management expense ratio increased 0.95pct to 14.71% year on year. On the profit side, the company's net interest rate for the first three quarters was 10.64%, down 3.25 pcts from the same period last year.

The leading position in financial IT is stable, and the competitiveness of Xinchuang+AI continues to improve. According to the company's official account “Hang Seng Electronics Co., Ltd.”, in August, the company reached a strategic cooperation with Kirin Software. Currently, the company has established good cooperation with core domestic manufacturers and research institutes such as Huawei, Haiguang, Kirin Software, OceanBase, Dameng, OpenEuler, and OpenGauss. In the same month, several of the company's core business products passed the full-stack Xinchuang adaptation verification of the securities fund industry's information technology innovation application base, including: Hang Seng LDP Securities Fast Trading System, Hang Seng LDP Express Market System, and Hang Seng Wealth Investment Business Trading Platform. The Hang Seng UF3.0 financing and securities lending system has switched all customers at Orient Securities, and the financing and securities clearing system has been adapted to credit innovation. On the AI side, in September, the company released WarrenQ 2.0, an upgraded version of the intelligent investment and research platform, improving overall accuracy and completeness in the three classic functions of Chat, ChatMiner, and AI writing. At the same time, it also launched three new functions of conference assistant, dehydration research, and policy comparison empowered by large models. In terms of industry status, Hang Seng Electronics ranked 22nd in the 2024 Global Fintech Rankings Top 100 (IDC FinTech Top 100) list published by IDC, making it the highest-ranked Asian company. We believe that in the medium to long term, Financial Credit Innovation has entered the deep-water zone, and the company is still expected to fully benefit as a leading financial IT company.

Profit forecast and investment suggestions: According to the company's 2024 three-quarter report, we adjusted the company's profit forecast. The company's net profit for 2024-2026 is 1.513 billion yuan (previous value was 1.53 billion yuan), 1.767 billion yuan (previous value was 1.801 billion yuan), and 2.133 billion yuan (previous value was 2.176 billion yuan), corresponding to EPS of 0.80 yuan, 0.93 yuan, and 1.13 yuan, respectively, corresponding to October The closing price of PE on the 31st was 33.6 times, 28.7 times, and 23.8 times, respectively. The company has always maintained a leading position in the market and technology, and actively promoted the adaptation of financial credit innovation. Technological changes such as big models will also bring opportunities for the company to restructure its business. Furthermore, the equity incentive plan shows management's confidence in the company's long-term development. We continue to be optimistic that the company will maintain its leading position in the financial IT field, and that it will break through in the development of businesses such as next-generation core trading systems and next-generation investment trading systems, and maintain a “highly recommended” rating.

Risk warning: 1) Financial institutions' IT budgets fall short of expectations. Financial institutions' IT investment corresponds to the company's order source. If the customer's IT budget growth is weak, it will drag down the company's performance.

2) The development of the company's Xinchuang business fell short of expectations. Currently, the company's next-generation core system, UF3.0, continues to iterate, and the benchmark project has reached the milestone launch target. At the same time, many new customers have been signed, and the next-generation investment and transaction system O45 has also signed a number of new leading customers. However, if the expansion of the company's products in the field of financial credit innovation does not meet expectations, then there is a risk that the company's credit innovation business will not meet expectations. 3) Uncertainty in financial regulatory policies. The financial industry is far more affected by regulatory policies than most industries. If financial supervision is too strict, it will limit product and service innovation and corresponding business development, and inhibit corresponding IT business growth on the demand side.