Incident: Dahua shares released its 2024 three-quarter report. In the first three quarters, the company achieved operating income of 22.45 billion yuan, a year-on-year increase of 0.77%; net profit to mother was 2.545 billion yuan, a year-on-year decrease of 1.74%. In the third quarter, the company achieved revenue of 7.583 billion yuan, a year-on-year decrease of 0.8%, and achieved net profit of 0.735 billion yuan to mother, an increase of 19.75% over the previous year.

Gross margin declined slightly. Financial products and shares held by the company in the third quarter were boosted by the capital market and had certain returns. Excluding this part of the impact, the company achieved deduction of 0.499 billion yuan in non-net profit in Q3, a year-on-year decline of 22.91%. The gross profit margin for the first three quarters was 40.81%, a slight decrease of 0.46% year over year.

Government business stabilized. In the third quarter, the company's domestic business continued its performance in the first half of the year. Driven by central project construction, the emergency industry in the field of social governance and the digital upgrade business in the field of major transportation grew faster. However, due to the continued downturn in the real estate construction sector, corporate business was under slight pressure.

Strategically invest in AI and public cloud. The company's R&D investment is based on two major strategies: AI and public cloud. In terms of AI, the company has accumulated more than a thousand algorithms to empower thousands of industries with the goal of analysis.

The company focuses on combining large and small models in the implementation process to meet the fragmented needs of customers and achieve wider commercial implementation. In addition, the company develops public clouds to serve commercial customers through cloudization.

Cooperation with China Mobile is growing steadily. Cooperation between companies and mobile companies increased slightly year-on-year in the first three quarters, with integrated businesses growing slowly. However, the company has achieved remarkable results in aligning with mobile organizations and communicating between groups and provinces. The two sides are jointly promoting standardized product warehousing, technical cooperation on artificial intelligence, and IoT platform construction, including the company's cooperation with China Mobile IoT to develop 12 standard scenario-based solutions. The two sides have already carried out comprehensive cooperation on mobile's strategic planning and Dahua's platform construction capabilities. We are optimistic that the cooperation between the two sides will have better investment suggestions in the fourth quarter and the future: the company's performance in the first three quarters was affected by the general environment, and gross margin declined slightly. The company's strategic investment in AI and public cloud, and cooperation with China Mobile continues to support the continuous improvement of the company's business. We are optimistic about the future development of the company. We expect to achieve revenue of 35.86 billion yuan, 41.326 billion yuan, and 48.491 billion yuan in 2024-2026; net profit to mother of 3.983 billion yuan, 4.595 billion yuan, 5.45 billion yuan; EPS 1.21, 1.40, 1.66 yuan, PE 14X, 12X, 10X, maintaining a “buy” rating.

Risk warning: The digital development of the industry falls short of expectations; market competition intensifies; risk of losing users; risk of technology application falling short of expectations.