Incidents:

On October 30, 2024, the company released its three-quarter report for 2024: the company's revenue for the first three quarters of 2024 was 4.396 billion yuan, -8.03%; net profit to mother was 0.213 billion yuan, -18.47% year over year; net profit after deduction was 0.185 billion yuan to mother, -12.96% year on year, and operating pressure still exists. On the one hand, it was affected by the weakening external macroeconomy, and on the other hand, the company took the initiative to divest low gross margin businesses and improve the quality of operations.

2024Q3, the company's revenue was 1.438 billion yuan, -15.96%; net profit to mother was 0.021 billion yuan, +59.71% YoY; net profit after deduction was 0.011 billion yuan, +743.35% YoY.

Investment highlights:

Digital cost revenue was -1.29% year over year, and renewal rates for cost products were stable but new purchases fell short of expectations in the first three quarters of 2024. Digital cost business revenue was 3.625 billion yuan, -1.29% year over year, and cloud contracts were 2.346 billion yuan, or -7.41% year over year. The renewal rate and application rate of cost products remained stable, but due to the overall boom in the industry and the decline in project start-up volume, new purchases fell short of the company's expectations.

In terms of product structure, traditional cost tools and new digital cost revenue have declined. Some products, such as bid clearance software, index networks, and suggested procurement prices, have maintained a good growth trend due to rising customer demand; in terms of customer structure, demand from large customers is relatively stable, and demand from small to medium customers has declined relatively significantly. The subsequent digital cost business will strengthen the in-depth management of existing customers, raise competitive barriers, and stabilize the basic market; at the same time, it will further increase investment in new fields such as internationalization, infrastructure, new infrastructure, and manufacturing, focusing on expanding the Southeast Asian region, as well as fields such as water conservancy, industrial parks, new energy industries, and urban renewal to promote continuous business growth.

Digital construction will focus on improving the quality of core products. Digital design accelerates the establishment of project benchmarks in the first three quarters of 2024. The digital construction business/digital design business revenue was 0.451/0.047 billion yuan, -40%/-26.22% over the same period last year. The market penetration and coverage rate of the construction business is still low, but the number of projects started due to the external environment has affected business development to a certain extent; the company's construction business went from pursuing scale adjustments to focusing on profit and cash flow, and the results have already been shown, and the share of core products in the contract structure has increased markedly. The current scale of the digital design business is still small. The focus is still on opening up design and cost integration, verifying and polishing products among customers, establishing enterprise and project application benchmarks, and laying the foundation for subsequent large-scale promotion.

Refined management goals are progressing steadily. In the first three quarters of 2024, the policy strengthens the industry, and the company's gross sales margin was 86.21%, +1.16pct; sales/management/ R&D expense ratios were 26.48%/22.90%/28.89%, respectively, -2.1/+2.38/ -0.53pct; the main reason for the increase in management expenses is due to some business adjustments and an increase in one-time compensation; the company's business focus and strengthened cost control, and sales and R&D expenses have declined. Currently, the number of employees is more than 8,000. Compared to the end of 2023, there was a marked decrease in the number of people over 10,000.

After the Politburo meeting on September 26, the company's macroeconomic development and real estate infrastructure expectations improved markedly. In addition to the impact of interest rate cuts, a series of policies such as loosening purchase restrictions and lowering interest rates on existing mortgages may reverse expectations in the real estate market. Since October, real estate sales data has gradually picked up, and the Ministry of Housing and Construction said at a press conference that the real estate market has begun to bottom out after three years of adjustments. Furthermore, as policies help local governments relieve debt pressure, they will further support infrastructure investment and speed up project construction progress, and the cash flow of construction companies is expected to improve. Looking forward to the future, the digitalization of the construction industry is the general trend, and the industry may gradually pick up as policies strengthen.

Profit forecast and investment rating: The company is a leading domestic construction IT enterprise. Currently, it continues to optimize its business layout and continuously improve the quality of operations; with the gradual implementation of a package of policies, downstream real estate companies are expected to see an improvement in cash flow, and the company's performance is expected to gradually recover. The company is expected to achieve revenue of 6.291/7.055/ 7.993 billion yuan in 2024-2026 and net profit of 0.478/0.784/0.992 billion yuan; the corresponding 2024-2026 EPS is 0.29/0.47/0.60 yuan, and PE is 46/28/22x respectively, maintaining a “buy” rating.

Risk warning: The digital transformation process of construction is slowing down, the growth rate of the downstream construction industry is slowing down, macroeconomic fluctuations, competition is intensifying, and product progress falls short of expectations.