Performance review
The 2022 results were in line with our expectations. 1Q23 fell short of our expectations. The company announced 2022 results: revenue of 908 million yuan, +5% year on year; net profit of the mother was 59 million yuan, -76% year on year; net profit of the non-return mother was 40 million yuan, -82% year on year. Looking at a single quarter, the company achieved revenue of 611 million yuan in 4Q22, +30% year on year; net profit of returned mother was 240 million yuan, +14.31% year on year; net profit after deducting non-return mother was 229 million yuan, +15% year on year. The performance for the full year 2022 was in line with our expectations.
The company announced its 1Q23 results: revenue of 37 million yuan, -52% of the previous year; net profit of the mother - 89 million yuan, an increase in loss over the previous year; net profit after deducting the net profit of the mother - 96 million yuan, an increase in loss over the previous year. 1Q23 The customer's business status has not fully recovered, the bidding progress has fallen short of expectations, and the performance has fallen short of our expectations.
Development trends
Localization in 2022 is in a transition period. The slowdown in pace affected middleware revenue, and the growth rate of security and emergency services was impressive. By industry, throughout 2022, revenue from key industries such as telecommunications, finance, and energy was +18%/12%/14%, respectively, with steady growth; affected by the pandemic and the phased slowdown in the pace of localization, basic software revenue was -29% year on year; however, safety and emergency business revenue was +42%/36% year on year, respectively, and overall overall revenue growth remained positive. In terms of gross margin, gross margin declined but remained at a high level of 70% due to income restructuring throughout 2022, and 1Q23 improved month-on-month and rebounded to 74%. In terms of expenses, the company's sales/R&D expenses ratio for the full year of 2022 was 26%/25%, respectively +5/3ppt, compared to +5/3ppt, respectively. Furthermore, other earnings in 2022 were affected by the reduction in government subsidies and VAT refunds by -78% year on year. Profit is under pressure under the combined influence. We expect an improvement in 2023.
Wait for demand for localization to recover. We believe that domestic substitution is a definite trend from a medium- to long-term perspective. Looking at the trend, localization is expected to further penetrate the township government, e-government, and key industries such as finance, telecommunications, energy, etc. in 2023, driving the company's high-margin middleware business to return to growth; the security emergency business is developing steadily, and AIGC algorithm security assessment tools are being developed. Safety and emergency services performed steadily in 2022, winning bids for many key projects such as China Unicom and the Ministry of Emergency Management throughout the year. Furthermore, in response to possible security issues with novel interactive AICG algorithms such as ChatGPT, which have recently become popular, the company set up a joint innovation center with Beijing University of Posts and Telecommunications and the Institute of Space and Space Research of the Chinese Academy of Sciences to develop relevant safety assessment test methods and tools. The company expects to release test platform services for industry customers by the end of this year. We recommend continuing to monitor subsequent developments.
Profit forecasting and valuation
We kept our revenue and profit forecasts for 2023/2024 basically unchanged and maintained an outperforming industry rating. Considering the recent rise in the sector valuation center, we raised the target price by 25% to $30 (based on 45 times the price-earnings ratio valuation in 2023). There is 20% upside from the current stock price. The current stock price corresponds to 38/28's 2023/2024 P/E.
risks
The progress of domestic substitution falls short of expectations, and there is a risk of market competition.