By selling its shares in Zero Run Automobile (09863.HK), Dahua Technology (002236.SZ) achieved nearly 4.5 billion yuan in investment income in 2023. Where does the growth potential lie for this leading security stock involved in artificial intelligence (AI) business? And how will the cooperation with China Mobile generate synergistic effects?

On the evening of April 15, Dahua Technology released its 2023 annual report and the first quarter report for 2024, with single-digit growth in operating income and net profit driven by investment income, which has caused investors to worry about its prospects. In addition, the fact that Dahua Technology's accounts receivable account for more than 30% of total assets has also raised market concerns about the quality of its assets.

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On April 16, Dahua Technology's stock price plummeted by 5.53%, closing at 17.58 yuan per share.

Single-digit revenue growth rate

In 2023, Dahua Technology achieved operating income of 32.218 billion yuan, a year-on-year increase of 5.41%; it achieved net profit attributable to shareholders of the parent company of 7.362 billion yuan, a year-on-year increase of 216.73%; and it achieved net profit attributable to the parent company after deducting non-recurring gains and losses of 2.962 billion yuan, a year-on-year increase of 87.39%.

Regarding the nearly 4.5 billion yuan in investment income, Dahua Technology stated that it was mainly due to the disposal of 7.88% of the equity in its affiliated company, Zero Run Technology.

Guotai Junan Securities analyst Liu Gaochang commented that Dahua Technology's performance in 2023 grew steadily, coupled with excellent cost control capabilities, which has optimized the company's profitability. In 2023, Dahua Technology's gross margin reached 42.04%, an increase of 4.17 percentage points compared to the same period in 2022. From 2023 to the first quarter of 2024, the company's profit performance has always been better than its revenue performance, and it is expected that this trend will continue throughout this year.

In its annual report, Dahua Technology made a risk warning: "The intelligent IoT industry is a typical technology-intensive industry, with extremely rapid updates and changes. If the company cannot keep up with the development trend of industry technology, fully pay attention to the diversified and personalized needs of customers, and if there is insufficient subsequent R&D investment, it will still face the risk of declining market competitiveness due to the inability to maintain continuous innovation capabilities. The company, by increasing R&D investment, continuously strengthens the research of core technologies in multi-dimensional perception, artificial intelligence large models, video cloud, big data, network communication, network security, machine vision, and other fields, reserves products, technologies, management, and talent resources to cope with the broader market in the future, and achieves the continuous and stable development of the company's business."

In the first quarter of 2024, Dahua Technology achieved operating income of 6.181 billion yuan, a year-on-year increase of 2.75%; net profit attributable to shareholders of the listed company after deducting non-recurring gains and losses increased by nearly 26% year-on-year, reaching 501 million yuan. Among them, the financial cost was -52.6 million yuan (a financial gain), compared to 48.36 million yuan in 2022. Dahua Technology explained: "This is mainly due to the increase in net interest income compared to the same period last year and the decrease in exchange losses compared to the same period last year."

With the support of China Mobile, how to develop artificial intelligence?Investment in Zero Run Automobile has become an important source of Dahua's performance last year. However, what investors are more concerned about now is whether Dahua's investment in the field of artificial intelligence, backed by the "big tree" China Mobile, can really drive the company's performance?

In April 2023, Dahua completed a private placement of 293 million shares to China Mobile Communications Group Co., Ltd., raising 5.09 billion yuan, with each share priced at 17.4 yuan. By the end of March 2024, China Mobile Communications Group Co., Ltd. held 8.9% of Dahua's shares. Analyst Pan Han from Tianfeng Securities stated that China Mobile proposed the new concept of computing power network in 2021, and at the same time, it widely laid out visual AI, built an AI visual platform, and laid out including image semantic understanding, video content mining, and 3D vision; Dahua has an industry-leading advantage in AI, and its advanced technology research institute focuses on R&D in the AI field. Based on the high complementarity of both parties' resources, this cooperation will effectively promote the integration of both parties' resources, and the future cooperation space can be further anticipated.

Dahua's annual report shows that the rapid development of the AI field, the company will continue to make high-intensity R&D investment in related fields, promote the large-scale landing of the AI industry, deepen the research and application of Dahua's "Xinghan" industry model, explore the activation of data element value centered on video, and empower the construction of an efficient urban governance system and the transformation and upgrading of corporate digital intelligence.

"After years of accumulation, the company has accumulated a large amount of business experience in multiple industries of the government and enterprises. The company will focus on industry needs, combine multimodal and large model technology capabilities, and focus on promoting the research and development and industrial landing of industry visual large models for industry applications, further accelerating the business expansion of government and enterprise digital intelligence, and increasing the penetration rate of intelligence." Dahua emphasized its cooperative relationship with the government.

In addition, the value of artificial intelligence, AI large models, and IoT data centered on video applications is continuously increasing, and the market space of the smart IoT field centered on video is further expanding. At present, the overall intelligent transformation and upgrading of the industry is still in the primary stage, facing the digital intelligence development demands of thousands of industries, there are both opportunities and challenges. The government and enterprises have reached a consensus that high-quality development can be achieved through digital intelligence transformation, and the industry has a strong demand for digital intelligence transformation. However, there are fragmented and differentiated needs between different industries and even within the industry. How to reduce costs, quickly meet the fragmented and differentiated market demands in a controllable manner, and enhance the scale effect is the current challenge.

Regarding the "risk of declining local fiscal payment capacity", Dahua also made a reminder: at present, some local fiscal debt levels are high, and if the payment capacity decreases, it may lead to a slowdown in industry demand growth, extension of project construction periods, extension of corporate capital recovery cycles, customer payment delays, and other risks. The company continues to improve internal control systems, optimize project review methods, carefully select local engineering projects, systematically assess project risks, cautiously evaluate the market logic and project cash flow balance logic of the project, reasonably control risks, and make plans to cope with the risks of cash flow shortages and project delays, to reduce the risks of delayed payments.

By the end of March 2024, Dahua's accounts receivable reached 15.379 billion yuan, accounting for more than 30% of the total assets of 49.94 billion yuan.