The company released its three-quarter report for 2024. The first three quarters achieved operating income of 2.326 billion yuan, a year-on-year decrease of 8.19%, and realized net profit to mother of -0.21 billion yuan, compared with a profit of 0.241 billion yuan for the same period last year. Among them, 24Q3 revenue was 0.752 billion yuan, down 25.65% year on year, and net profit to mother was -0.028 billion yuan, compared with profit of 0.057 billion yuan for the same period last year. In the first three quarters of 2024, the company received 2.322 billion yuan in cash from sales of goods and services, an increase of 3.37% over the previous year. The repayment situation was better than the revenue situation. In the first three quarters, the company's related transactions with China Mobile amounted to 0.746 billion yuan, an increase of 80.04% over the previous year, and the synergy between China Mobile Real Control Company was significantly strengthened. We expect the company to further deepen its cooperation with mobile next year, providing new impetus for the company's long-term performance growth and maintaining the buying rating.

The increase in the share of integrated projects led to a decline in gross margin. In the first three quarters, the company's gross margin fell 54.78% year on year in the first three quarters of 2024, down 7.07pct year on year, mainly due to the increase in the share of integrated projects with low gross profit. Sales/management/R&D rates were 32.48%/6.06%/27.03%, respectively, down 0.34/0.29/1.23pct year on year. 2024Q3's gross margin was 51.15%, a year-on-year decrease of 13.07pct. Sales/management/R&D rates were 28.59%/6.22%/21.45%, respectively, with a year-on-year change of 0.38/1.63/-1.23pct. The three-quarter rate increased slightly, mainly due to the decline in revenue.

Xinchuang Security and Data Security performed well. The core team remained stable. The company insisted on product innovation. The revenue of Xinchuang Security increased by nearly 30% year-on-year in the first three quarters. Anxing AI Smart has passed the evaluation of the Academy of Information and Communications Technology and achieved commercial implementation at the Zhongshan Municipal Administration and Data Bureau and China Mobile Chongqing Branch; Data Oasis released new products and implemented them in various big data group projects. After China Mobile became the actual controller of the company, the company continued to pay attention to the stability of the core team, insisted on high-quality and sustainable development, further strengthened team building, increased the number of R&D personnel by more than 100 people, and achieved almost zero loss of core backbone teams.

China Mobile led to a high increase in the company's cloud security business, and the company's long-term performance growth welcomed a year-on-year increase of more than 70% in the first three quarters, mainly due to the company's continued increase in the construction of collaborative channels with China Mobile. It has already opened a channel for security capabilities to the cloud, held a national cloud security business deployment conference, and launched 16 42 models and 116 cloud security products in mobile cloud malls. In terms of standard products, the company's ONes business platform has been launched at the China Mobile customer center, signed and completed provincial framework agreements, and achieved the construction of benchmark projects in all provinces.

Profit forecasting and valuation

Taking into account weak demand for cybersecurity, we expect the company's net profit to mother for 2024-2026 to be 0.811/0.994/1.21 billion yuan, respectively (previous value: 0.924/1.15/1.427 billion yuan). Referring to the comparable company Wind, an average of 29.32 times 25PE, and considering the continued deepening of cooperation between the company and China Mobile, the company was given 30 times 25PE, with a target price of 24.48 yuan (previous value 18.96 yuan).

Risk warning: Cooperation with China Mobile is progressing at a pace that falls short of expectations, and new business development falls short of expectations.