Matters: Performance increased by 3.96%, falling short of expectations. Zhaori Technology (300333) released its three-quarter report on October 24. The company achieved revenue of 165 million yuan in January-September, an increase of 11.13% over the previous year; net profit attributable to the parent company was 624.937 billion yuan, an increase of 3.69% over the previous year. The corresponding EPS is 0.67 yuan, which is lower than the market and our expectations. Main opinion: Performance declined due to increased competition in the industry and increased economic uncertainty. The company's performance in the third quarter fell 9.18%, mainly due to the following reasons: (1) factors of macroeconomic uncertainty have increased, and bank procurement has been delayed; (2) with the increase in market penetration rate of anti-counterfeiting products for financial instruments, competition in the electronic payment cryptography market has intensified, and the sales price of electronic payment cryptography, one of the company's main products, has declined to a certain extent, causing the company's gross margin to fall from 80.62% at the beginning of this year to 70.91% in a single quarter, but it has remained at a high level. In addition, increased sales pressure also caused the company's sales expense ratio to rise to 11.62% from 7.36% at the beginning of the year, and the management expense ratio to 14.95% from 12.89% at the beginning of the year. Faced with a more severe business environment, the company experienced a year-on-year decline in single-quarter results in the third quarter. In the future, the company is expected to adjust its business strategy, provide customers with products with better functionality and higher added value based on continuous R&D investment and product upgrades; and face market competition with continuous innovation in technology and marketing with effective market development, channel construction, and sales services as the main line. Accelerate the promotion of fund-raising projects and ease the pressure of increased competition. Since the company went public, it has accelerated the construction and implementation of fund-raising projects, and has launched an electronic payment password upgrade product on the market ahead of the fund-raising plan. Since the functionality and performance of the new product have been greatly improved, it has brought higher added value to customers, so it can be promoted rapidly in a short period of time. Under the trend of a large decline in sales prices of existing products, the new products mitigated the downward trend in the company's gross margin to a certain extent. One of the company's priorities in the fourth quarter was to vigorously promote the sales and promotion of new products in the banking system. It is expected that the continuous increase in the sales ratio of new products will further mitigate the downward trend in gross margin caused by falling prices of existing products. In the future, the company is expected to ease the pressure brought about by competition from the following aspects: (1) continue to invest in research and development, and launch upgraded products for electronic payment cryptography systems one after another in accordance with the fund-raising plan to provide customers with higher performance products and added value, thereby increasing the coverage of the company's products and enhancing the market competitiveness of the company's main business; (2) accelerate the industrialization and commercialization of self-developed patent technology and anti-cloning technology to increase new profit growth points; (3) consider investing in fields related to the company's main business and development strategy. The target price was 20.93 yuan, which was lowered to hold. The major challenges brought about by changes in the market business environment since this year have put some pressure on the company to grow. We conservatively estimate that without mergers and acquisitions and anti-cloning equipment that cannot contribute profits to the company, the EPS that the company can achieve in 2012-2014 is 0.78 yuan, 0.91 yuan, and 1.07 yuan, respectively, corresponding to 24.65 times, 21.23 times, and 17.97 times PE, respectively. The target price was adjusted to 20.93 yuan, and the holding rating was given.