Performance review

Xinan Century's 1Q23 revenue fell 19.3% year on year, lower than market expectations, Xinan Century announced 1Q23 results: revenue was 51.67 million yuan, down 19.3% year on year, Guimu's net loss was 32.57 million yuan, loss increased by 31.01 million yuan year on year, Guimu's net loss rate increased 60.6 ppt to 63.0% year on year after deduction, net loss of 32.79 million yuan year on year, and loss increased 29.73 million yuan year on year. Due to cyclical changes in downstream customer investment, it fell short of market expectations.

Development trends

Revenue fluctuated in the short term, and gross margin increased steadily. The company's revenue in the first quarter declined year-on-year. We believe that the company's revenue is expected to recover, mainly due to cyclical changes in the pace of investment in the financial industry, which is mainly due to the recovery of investment in the financial industry in the cryptographic sector and the steady expansion of the company's customers in other industries. At the gross margin level, the company's 1Q23 gross profit margin was 73.6%, up 0.9 ppt over the previous year and 3.5 ppt over the previous month.

Investment in industry and research continues to increase. In 1Q23, the company's three expenses (sales, management and R&D) increased 45.3% year-on-year to 76.63 million yuan. Among them, sales/management/R&D expenses increased 49.7%/12.9%/54.5% year-on-year to 2,503/1,106/4054 million yuan, and the sales/management/R&D expenses ratio was 48.4%/21.4%/78.5% respectively, up 22.3/6.1/37.5ppt, respectively. The increase in R&D expenses is mainly due to the company's reserve of outstanding R&D talents and R&D personnel salary increases and the amortization of equity incentive expenses. The company's net operating cash flow was 42.82 million yuan, an increase of 8,521 million yuan over the previous year. Among them, 1Q23's inventory turnover days (536 days) were +167 days compared to the previous year, the number of accounts receivable turnover days (648 days) was +323 days compared to the previous year, and the number of accounts payable turnover days (405 days) was +116 days compared to the previous year.

The implementation of policies has led to an increase in demand. On April 14, 2023, the State Council reviewed and passed the “Regulations on the Administration of Commercial Passwords (Revision Draft)”, highlighting the importance of commercial passwords. We believe that the application and management of commercial secrets will be further regulated, and the implementation of policies is expected to drive growth in downstream demand. The main growth impetus for the cryptographic industry comes from: 1) the release of compliance requirements brought about by secret reviews; 2) the reform of national secrets; 3) in the context of data elements, cryptography, as the basic foundation of data security, is expected to release additional volume. As a result, overall industry sentiment is expected to boost.

Profit forecasting and valuation

The 2023/2024 earnings forecast remains unchanged. The current stock price corresponds to 29.0/22.9 times P/E of 2023/2024. Maintaining an outperforming industry rating and a target price of 63 yuan corresponds to 39.8/31.4 times P/E in 2023/2024, which has an upward margin of 37.2% compared to the current stock price.

risks

The implementation of the policy fell short of expectations, and the expansion of new products fell short of expectations.