Event: on August 25, 2022, 360 released its semi-annual report for 2022. In the first half of 2022, the company achieved operating income of 4.824 billion yuan, down 14.16% from the same period last year; net profit from home was-398 million yuan, down 169.63% from the same period last year; and non-net profit was-505 million yuan, down 201.73% from the same period last year.

Business segments: Internet (advertising + games), smart hardware, security and others realized business income of 28.49,9.12 and 1.038 billion yuan respectively, down 21.96%, 13% and 13.78% respectively compared with the same period last year.

The gross profit margin increased slightly and the expense rate increased compared with the same period last year. In the first half of 2022, the company achieved a gross profit margin of 59.31%, an increase in 0.41pct compared with the same period last year. In the first half of 2022, the company's sales expense rate, management expense rate, R & D expense rate and financial expense rate were 20.16%, 7.10%, 33.43% and-5.52% respectively, an increase of 0.28,1.98,2.38 and 1.14pct respectively over the same period last year. The main reason for the decline in revenue is the decline in Internet business, and the reasons for losses are as follows: 1) the epidemic spread frequently in the first half of the year, the budget of advertisers has tightened, and the overall decline of the Internet advertising industry is relatively serious; 2) the company's security business continues to invest, and the first half of the year is the off-season of security business; 3) the losses of some major investment targets are included.

The proportion of security business has increased and the security framework has been upgraded in an all-round way. 2022H1, corporate security and other businesses (mainly government and enterprise security and technical services, hosting services, cloud / cloud disk services, etc.) accounted for 21.52% of revenue, which increased 5.29pct compared with 16.23% of 2021H1. At the beginning of the year, the company announced a comprehensive transformation of digital security companies, starting a new journey to lead the development of digital security. Through the continuous cultivation of the industry and region, the company has achieved sustained growth in customers and orders: the overall number of newly signed customers has increased by nearly 30% compared with the same period last year, of which the number of newly signed customers in the regional business has increased by nearly 50% compared with the same period last year, and the newly signed amount has increased by more than 30% over the same period last year. Revenue from core security products continues to grow at a high speed: the company's situational awareness based on digital security brain and XDR security operation platform product order revenue increased by more than 70% compared with the same period last year; NDR product order revenue increased by more than 1.5 times year-on-year; revenue from cyberspace mapping products increased by more than 80%. In terms of urban expansion, the company worked hard to overcome the impact of the epidemic, successfully completed the receipt of orders in Suzhou, Qingdao and Hebi, while in-depth contact with a number of cities, business development momentum is strong.

The Internet business is affected by the environment, and the company has a solid foundation. The epidemic situation continued to repeat in the first half of the year, the overall growth of the market was under pressure, and the overall environment of the game industry was grim. According to authoritative departments such as the Game work Committee of the China Audio and Digital Association, in the first half of 2022, the actual sales revenue of China's game market was 147.789 billion yuan, down 1.8 percent from the same period last year; the number of game users was about 666 million, down 0.13 percent from the same period last year, and the number of users decreased slightly. The game industry user growth dividend is almost fading, entering the era of stock competition. The company has stable traffic to lay the foundation: according to iResearch, as of 2022H1, the market penetration of the company's PC security products is 99.5%, with an average of 480 million monthly active users, ranking first in the security market; PC browser market penetration is 87.7%, with an average of 420 million monthly active users; and the average monthly active users of mobile security products reach 370 million. 2022H1, the company's PC end market penetration and the number of active users have increased significantly. As the company's main position for Internet commercialization, PC side traffic has remained relatively stable, providing a solid foundation for Internet business.

Investment suggestion: as the company's business is affected by the market environment, we reduce the company's revenue in 2022-2024 to 106.65, 121.00, and 13.949 billion yuan, with a growth rate of-2.03%, 13.45%, 15.28%, respectively, and reduce the company's 2022-2024 net profit to 605, 1.080, 15.35 million, with a growth rate of-32.94%, 78.47% and 42.12%, respectively. The corresponding EPS from 2022 to 2024 is 0.08, 0.15 and 0.21 yuan respectively, and the current stock price corresponding to PE is respectively times that of 86-48-34. Maintain a "buy" rating.

Risk tips: increased market competition; new product research and development is not as expected; strategic promotion is not as expected; economic downside risks.