occurrences

The company released its 2019 annual report and 2020 quarterly report. The company achieved revenue of 1,565 million yuan in 2019, an increase of 51.62% over the previous year; it achieved net profit of 124 million yuan to the mother, a decrease of 8.88% over the previous year. The company achieved revenue of 270 million yuan in the first quarter of 2020, an increase of 51.84% over the previous year; it achieved net profit of 19.69 million yuan, a year-on-year decrease of -10037.39%.

Brief review

The company's revenue continues to grow at a high rate, upfront sales and R&D investment are gradually digested, and the cost rate is expected to gradually decline. The company achieved revenue of 1,565 billion yuan in 2019, an increase of 51.62% over the previous year, and revenue growth continued to be high. By business, public safety and emergency achieved revenue of 380 million yuan, an increase of 47.52% over the previous year. Currently, public safety platforms are being promoted to various provinces, cities and counties. The company occupies the market share of the vast majority of provincial emergency platform software, and the local city and county markets also continue to lead; the urban safety business achieved revenue of 378 million yuan, an increase of 14.41% over the previous year. In 2019, several new urban lifeline projects such as Foshan, Xuzhou and Huaibei were signed, which continued to achieve offsite replication; overseas business achieved revenue of 514 million yuan, an increase of 42.68% over the previous year, mainly due to the signing of several urban lifeline projects in Foshan, Xuzhou, Huaibei, etc. As a result of the gradual implementation of projects such as an integrated public safety platform in Angola and a customs management system in an African country, the company signed new projects in Latin America, Southeast Asia, Indonesia, Singapore, the Philippines, Laos, etc. in 2019, and will continue to grow rapidly in 2020. The company's fire protection business achieved revenue of 289 million yuan, an increase of 270.97% over the previous year. With the rapid expansion of the company's service capacity throughout the fire protection industry chain, project revenue grew rapidly. The company achieved net profit of 124 million yuan to its mother in 2019, a year-on-year decrease of 8.88%, mainly due to a decrease of 9.64 pct in the company's gross margin. The decline in the company's gross margin was mainly due to a relatively large share of the hardware portion of some major projects. At the same time, revenue from the fire engineering business also increased. In terms of expenses, the company's expense rate during 2019 was 30.73%, down 4.71 pct from the previous year. Among them, the sales expense ratio was 10.78%, a decrease of 0.3 pct; the management expenses rate was 11.42%, down 2.09pct from the previous year; the R&D expenses rate was 8.08%, down 2.9pct from the previous year. The number of R&D personnel in the company was 644, down 68 from the previous year. It is expected that research and development of the company's main projects is nearing completion, and some R&D personnel will begin to meet more first-line needs. As the company experienced a sharp expansion in personnel recruitment in 2018, sales and R&D investment for early fund-raising projects were basically absorbed in 2019, and it is expected that the company's expense ratio will continue to decline.

Under the influence of the COVID-19 pandemic, profits were slightly lost in the first quarter. The company's 2020 Q1 revenue increased by more than 51.84% year-on-year, mainly due to the company actively promoting the implementation of signed projects. The company achieved net profit of 19.69 million yuan in 2020Q1, a year-on-year decrease of 1037.39%. On the one hand, the decline in profit in the first quarter was affected by customer structure, contract types, and business seasonality. The company confirmed more revenue from some businesses with lower profit margins in the first quarter, which led to a decline in profits. On the other hand, due to the impact of the COVID-19 pandemic, the company's project implementation, delivery, and acceptance were all delayed in the first quarter, while expenses such as employee remuneration were relatively rigid, so the company's profits declined. As the domestic epidemic nears its end and various regions have resumed work and resumed production one after another, relevant bidding has also gradually resumed, and the company will continue to develop relatively rapidly.

Build a blueprint for the “two clouds, two centers, and one base” security industry to fully benefit from the rapid development of the safety industry. Overall, China's public safety industry is in a stage of rapid development. According to statistics from CDI consultants, the total output value of China's safety industry was 889.8 billion yuan in 2018, an increase of 15.1% over the previous year. It is expected that China's safety industry will continue to maintain a growth rate of around 20% in 2020, and the scale of the industry will exceed trillion yuan. In 2019, the company integrated existing products and services to form an overall development and promotion model of “two clouds, two centers, one base”, focusing on building a comprehensive emergency command center, urban safety operation monitoring center, fire safety cloud, industrial safety cloud and safety education base. In 2020, the company will also promote the development of new businesses such as fire safety, industrial safety, environmental safety, safety culture and education, thus forming a new revenue increase. The urban lifeline business will continue to expand coverage and offsite replication in individual cities. The overall market size of domestic urban lifeline projects is expected to reach around 110 billion. Currently, it is still in the early stages of development. It is still too early to reach the ceiling, and there is broad potential for development.

Today and next year will be the peak of construction of public safety platforms in various provinces and cities. As a software leader in this field, the company is expected to continue to grow at a high rate in 2020.

Profit Forecasts and Investment Ratings:

The company maintained high revenue growth in 2019. Due to an increase in the share of low-margin hardware business and fire engineering business, gross margin declined, which led to a decline in profit. Profit losses occurred in the first quarter due to the impact of the COVID-19 pandemic and confirmation of some low gross margin business income, and expenses were relatively rigid.

At present, China's safety industry is still in a rapid development stage. The company has built a blueprint for the “two clouds, two centers, and one base” safety industry. In the future, it will continue to maintain its competitive advantage in the field of emergency platform software, promote the replication of urban lifeline services from other locations, and accelerate the development of new businesses such as fire safety, industrial safety, environmental safety and safety culture and education. The company's net profit from 2020 to 2021 is estimated to be 180 million yuan and 271 million yuan respectively, corresponding to the current stock price of PE 53 and 35 times, respectively, maintaining the purchase rating.

Risk warning: Overseas order confirmation revenue fell short of expectations; Hefei's urban lifeline project fell short of expectations; other cities were slow to land.