Incidents:

On October 30, 2024, the company released its three-quarter report for 2024; for the first three quarters of 2024, the company's revenue was 4.188 billion yuan, -4.12%; net profit to mother was 0.446 billion yuan, -26.57% YoY; net profit after deduction was 0.267 billion yuan, or -50.28% YoY.

2024Q3, the company's revenue was 1.352 billion yuan, -12.26%; net profit to mother was 0.416 billion yuan, +159.18% YoY; net profit after deduction was 0.132 billion yuan, or -51.7% YoY.

Investment highlights:

Operations were under pressure in the first three quarters, and the Q4 industry is expected to gradually stabilize

The company's revenue declined year-on-year in the first three quarters of 2024, mainly due to a decline in businesses such as Fortune Services. By business: the company's wealth technology service revenue was 0.803 billion yuan, -20.32%; asset management technology service revenue was 1.01 billion yuan, -3.4% year over year; operating and institutional technology service revenue was 0.786 billion yuan, -6.54% year over year. Enterprise finance, insurance core and financial infrastructure technology services increased significantly, with revenue of 0.47 billion yuan, +16.74% over the same period last year. 2024Q3's net profit to mother increased dramatically, mainly due to non-operating profit and loss of 0.314 billion yuan due to profit and loss from changes in fair value of other illiquid financial assets held and disposed of by the company.

On September 24, 2024, the central bank created two structural monetary policy instruments to support the capital market; on September 26, the Politburo meeting emphasized “efforts should be made to boost the capital market”; on October 8, the A-share turnover reached a record high of 3.48 trillion yuan. Reviewing historical data, the performance of brokerage & asset management IT companies fully benefited from the general market rise; according to the Financial Services Association data, the share of brokers' IT investment in revenue increased from 6% in 2021 to 10.6% in 2023. We believe that 2024Q4 and financial institutions' IT spending is expected to gradually stabilize next year. Combined with the acceleration of financial credit innovation, the company's performance is expected to improve.

The company continues to improve quality and efficiency, optimize personnel structure and improve management efficiency

In the first three quarters of 2024, the company's gross sales margin was 69.31%, -2.58pct; sales/management/ R&D expense ratios were 11.98%/14.71%/40.24%, respectively, -0.22/+0.95/-0.6pct year on year. 2024H1, the company transferred the project-based business to a newly established subsidiary to establish a remuneration system and employment mechanism adapted to project-based businesses to enhance the competitiveness of these businesses; in addition, the company made full use of the current abundant supply opportunities in the human resources market to increase the introduction of high-quality talents in high-end technical positions, and optimize the company's overall talent structure. By the end of the first half of the year, the total number of people in the company was 12,700, a slight decrease compared to the end of last year, and the talent structure was continuously optimized.

Various product lines are progressing steadily, and WarrenQ2.0 was launched to deepen the big model to empower the field of investment and research

The company's various product lines are steadily expanding on the client side. On August 26, 2024, Orient Securities launched the UF3.0 financing and securities lending system to achieve full customer switching; in September 2024, the company's next-generation investment transaction management system O45 was launched on China Merchants Xinnuo Asset Management Co., Ltd. Since then, O45 has achieved full industry coverage and reached cooperation with more than 100 asset management institutions. In October 2024, Huachuang Securities launched the Hang Seng PB2.0 system to continue expanding institutional service capabilities.

At the end of September 2024, the company released a new upgraded version of the WarrenQ 2.0 intelligent investment and research platform. WarrenQ2.0 has a wider range of financial data coverage and a stronger financial investment and research model base, and is further deeply integrated into the financial business scenario. The three classic functions of Chat, ChatMiner, and AI writing have been improved to improve overall accuracy and completion, and three new functions of conference assistant, dehydration research, and policy comparison, which are empowered by large models, have been introduced to greatly improve investment and research efficiency. At present, WarrenQ has reached joint construction and exploration cooperation with many financial institutions such as funds and securities. In the future, it will further explore the “big model+AI tools+financial data” intelligent investment and research model with various financial institutions.

Profit forecast and investment rating: The company is a leading IT leader in securities & asset management. It has a stable advantage, focuses on first-class products, and improves quality and efficiency. We expect the company's revenue in 2024-2026 to be 7.305/8.021/8.958 billion yuan, net profit to mother of 1.512/1.731/2.041 billion yuan, EPS 0.80/0.91/1.08 yuan/share, respectively. The current stock price corresponding to 2024-2026 PE is 32/28/24 X, respectively, maintaining a “buy” rating.

Risk warning: The macroeconomic downturn affects downstream demand, Xinchuang's progress falls short of expectations, new technology research and development falls short of expectations, market competition intensifies, customer self-development competition, etc.