Event: The company released the “2020 Third Quarter Report” on the evening of October 29. In the first three quarters, the company achieved operating income of 416 million yuan, an increase of 0.20% over the previous year; net profit of 46.9819 million yuan was realized. Comment: The impact of the epidemic on the company's operations has gradually weakened, and gross margin is expected to rise steadily in the first three quarters. Affected by the epidemic, the overall network security customer base showed a deferred demand trend. Some of the more affected customer groups have even experienced budget cuts, which have had a certain impact on the industry and the company's business activities. In the third quarter, the company achieved operating income of 193 million yuan, an increase of 3.30% over the previous year, and realized net profit of 13 million yuan, a year-on-year decrease of 66.89%. In the first three quarters, the company's overall gross margin was 66.48%, a year-on-year decrease of 8.80pct. The main reasons were: 1) the epidemic affected customer demand, and in order to consolidate market competitiveness, the company adopted a corresponding price competition strategy; 2) to meet the diversified needs of customers, the company's security integration business ratio increased. As the company's revenue gradually diversifies and market development efforts for new products and services gradually increase, gross margin is expected to rise steadily. The company continues to increase investment in market and R&D, and the scale effect is expected to gradually be reflected in the first three quarters. The company's sales expenses were 159 million yuan, up 3.58% year on year, sales expenses were 38.23%, up 1.25pct year on year; management expenses were 307.1224 million yuan, down 6.63% year on year, management expenses were 7.38%, down 0.55pct year on year; the company continued to increase R&D investment, with R&D expenses reaching 154 million yuan, up 12.94% year on year. The R&D cost rate was 36.95%, up 4.17pct year on year. The company's period expense ratio is at a high level. The main reasons are: 1) the company is in a stage of rapid development and needs to continuously increase investment in R&D, sales, marketing, etc.; 2) the monetization of the company's investment in fields with high technology content requires a certain period of accumulation and reconciliation. With the gradual implementation of the company's product line expansion and marketing network expansion, the scale effect is expected to gradually be reflected, and the cost rate will gradually decline. The product line is gradually diversifying, and the security service business is expected to become the company's new performance growth point. Currently, the company's main revenue source is the border security product line, including next-generation firewalls and IDS/IPS. With the expansion of the company's product line, the share of border security products declined year by year. The share of revenue in 2016-2019 was 93.32%, 91.39%, 90.26%, and 85.80%, respectively; the cloud security product line grew rapidly, accounting for 1.17%, 3.51%, 4.23%, and 5.29% of revenue in 2016-2019, respectively. In June 2020, the company officially released Shanshi Nettech Safety Service. Based on the company's stable product quality, it provides customers with “caring, safe and worry-free” security services, which is expected to become a new growth point for the company's performance. Investment recommendations and profit forecasts With the implementation of policies such as Equal Insurance 2.0, the network information security industry has ushered in a high growth cycle, and the company is expected to fully benefit from the medium to long-term development process. Considering the impact of the COVID-19 pandemic, the company's 2020-2022 operating income was slightly lowered to 7.95 (down 0.58), 10.15 (down 0.73), and 12.63 (down 0.90) billion yuan, while net profit was slightly lowered to 1.03 (down 0.12), 1.29 (down 0.18), and 1.63 (down 0.24) billion yuan, and EPS was 0.57, 0.71, and 0.90 yuan/share. Currently, the PE of the Computer (Shenwan) Index is 71.9 times. Considering the company's current revenue volume is small and there is plenty of room for future growth, the company is given a target PE of 70 times in 2021. The corresponding target price is 49.70 yuan, maintaining the “buy” rating. Risks suggest that the COVID-19 pandemic is affecting the safety investment of downstream customers; policies such as Waiting Insurance 2.0 have fallen short of expectations; new product development and marketing have fallen short of expectations; industry competition has intensified, and industry profitability has declined.