Incidents:

The company released the first quarter report of 2023. 2023Q1 achieved operating income of 52 million yuan (down 19.29% from the previous year), net profit of the mother - 33 million yuan, and net profit of the mother after deduction - 33 million yuan.

Comment:

Revenue growth for the first quarter was lower than expected, mainly due to fluctuations in the financial client project construction cycle. The company's revenue growth in the first quarter of 2023 fell short of market expectations. The main reason was that the base was large due to the sudden increase in financial customer revenue in the first quarter of 2022, and the year-on-year decline in operating income in the first quarter of 2023. Customer system construction in the financial industry showed a slight explosion trend in 2022, as evidenced by the company's financial industry revenue in 2022, which was significantly higher than the same period in previous years.

Looking at the full year of 2022, considering that the financial industry business system is expected to enter a new round of planning and construction cycle, we believe that the trend of a single quarter is not representative of the whole year, and financial industry revenue is still expected to maintain a relatively steady growth throughout the year. At the same time, considering that the ability of government and enterprise customers to recognize passwords has improved rapidly in recent years, 2023 is expected to usher in accelerated growth.

Expense growth is manageable throughout the year

The company's 2023Q1 sales, R&D and management expenses increased by 49.7%, 54.53%, and 12.95% respectively, of which:

Sales expenses are mainly due to share payments and travel expenses generated by business development (in previous years, due to the positive increase in Q1 revenue, which was confirmed into operating costs with project revenue). Subsequently, as the company's revenue grew, related business development expenses were confirmed to the project cost, and the growth rate of the company's sales expenses is expected to return to normal levels.

The growth rate of R&D expenses is relatively fast. The main reason is that the company's personnel recruitment in 2022 is mainly concentrated in the second half of the year, and the 2022Q1 R&D expenditure base is low. Looking at the full year of 2023, the company's R&D expenditure growth is expected to remain at a manageable level.

Policy support, industry sentiment is improving

On April 14, 2023, the Executive Meeting of the State Council deliberated and passed the “Commercial Password Management Regulations (Revision Draft)”

(hereinafter referred to as the “Regulations”), and arrangements are made to regulate the application of commercial cryptography and promote the development of the commercial cryptographic market. The imminent implementation of the Regulations is expected to promote the transformation and industrial application of commercial cryptographic technology achievements and promote the sustainable and healthy development of the commercial cryptographic market.

Considering that the downstream demand boom is expected to continue in 2023, without taking into account the influence of the merger brought about by the acquisition of Universal Technology, we maintain our previous forecast. We expect the company's revenue for 2023-2025 to be 834, 10.56, and 1,338 million yuan respectively, and the net profit of the mother is 231 million, 305 million yuan, and 396 million yuan respectively. Referring to the closing price on April 28, 2023, the current price corresponds to 2023-2025 PE 27/20/16 times, respectively, maintaining the “buy” rating.

Risk warning: New business expansion falls short of expectations; progress in the acquisition of Universal Technology falls short of expectations; implementation of secret review policies falls short of expectations; government customer budget recovery falls short of expectations; market competition intensifies.