Incidents:

The company released its 2023 quarterly report, achieving operating income of 1,845.7 million yuan, YOY -0.8%, Q1 net profit of 28 million yuan, YOY +34.7% (net profit after deduction of 26 million yuan, YOY +62.1%), equivalent to EPS of 0.05 yuan. The performance slightly exceeded expectations.

Profitability increased significantly in the first quarter, which is expected to benefit from improved product structure: the company performed well in the first quarter, and profitability increased dramatically. Mainly, gross margin reached 26.8%, up 7.2 percentage points from the previous month and 2.7 percentage points from the previous year. The gross margin for a single quarter reached a new high in the past five years.

The increase in gross margin is expected to be due to further improvements in the company's revenue structure. The share of integrated business with low gross margin continues to decline, and the share of sales revenue of software integration services, cloud services, and independent software products with high gross margins continues to rise.

Business development in the market has been vigorously developed, and the cost ratio has increased: in the context of a sharp increase in gross margin, the company's cost ratio has increased. The company's Q1 sales/management/finance expense ratio was 3.38%/17.43%/0.45%, respectively, and +1.05/+1.83/-0.88 percentage points respectively over the previous year. It is estimated that the increase in sales expense ratio and management expense ratio is mainly due to accelerated business development and increased market investment during the post-pandemic period. The company's net interest rate in Q1 was 1.52%, an increase of 0.84 percentage points over the previous year. We believe that as the company further specializes in high-margin businesses and expands, profitability is expected to continue to improve in the future.

The complete software-side product system is expected to benefit from the second wave of innovation in the future: the company's products have an autonomous and controllable product system that includes the Prudential operating system, Jinchang Database, Jindie Middleware, and Huidian Office Software, and occupies a leading position in the field of government informatization. According to relevant policy guidelines, 2023 is expected to usher in the second round of the innovation cycle. The field of innovation and innovation will expand from the original party and government organs to eight major industries, including finance, telecommunications, electricity, petroleum, transportation, aerospace, education, and medical care, which will drive the rapid development of a new wave of innovation and innovation. As a leader in the industry, the company's performance is expected to improve rapidly.

Profit expectations: We expect the company's net profit for 2023-2024 to be 511 million and 629 million yuan, YOY +35.4% and +23.2% respectively; EPS is 0.82 yuan and 1.01 yuan respectively. The current stock price corresponding to A-share 2023 and 2024 P/E is 47 times and 38 times, maintaining the “buy” recommendation.

Risk warning: 1. The development of Xinchuang's business falls short of expectations; 2. The risk of increased market competition; 3. The progress of business transformation falls short of expectations.