Overview of events

The company released its semi-annual report on the evening of August 9, 2023. 23H1 realized operating income of 178 million yuan, an increase of 4.28% over the same period last year, and a single Q2 realized operating income of 126 million yuan, an increase of 18.45% year-on-year growth of 18.45%. 23H1 realized a net profit of-27.79 million yuan, and a single Q2 returned net profit of 4.78 million yuan, turning a loss to a profit. The company's performance has bottomed out in Q2 and is expected to achieve better growth in the second half of the year with the continuous promotion of commercial password policy. We remain optimistic about the company's full-year performance. It is expected that the company will go out of the quarterly upward trend driven by the policy.

Q2 performance bottomed out and rebounded, and better growth is expected for the whole year.

On the revenue side, the company's 23Q1 achieved revenue of 52 million yuan, down 19.29% from the same period last year and 126 million yuan from the same period last year, an increase of 18.45% over the same period last year.

From the perspective of revenue split, according to the disclosure of the report, 1) customers in the financial industry: demand and project promotion gradually recovered, with revenue of 101 million yuan in the first half of the year, down 14.18% from the same period last year. 2) customers in government industries: with the recovery of procurement and demand in departments such as data bureau, public security, medical, tobacco, water conservancy and other departments, government industry income reached 39.8229 million yuan, an increase of 84.24% over the same period last year. 3) Enterprise industry customers: due to the increased procurement demand of customers in the information technology software industry, manufacturing, financial services, etc., the income reached 37.3302 million yuan, an increase of 18.34% over the same period last year. The demand and delivery of customers in the company's financial industry have gradually recovered, government customers have achieved high growth, corporate customers have grown steadily, and the overall income structure is more balanced.

Looking forward to the whole year, on the one hand, the delivery pace of the financial industry is expected to continue to accelerate, thus promoting the repair of financial business, on the other hand, with the promotion of secret reviews and other policies, the government and enterprise market procurement demand for commercial passwords is expected to enter the business cycle, so we remain optimistic about the company's performance outlook for the whole year, and revenue growth is expected to improve quarter by quarter.

From the profit point of view, the company is still in a state of loss in the first half of the year, mainly due to the increase of cost investment.

According to the China Daily, in order to support the company's future rapid development and reserve high-end talents in technology research and development, product planning, and program promotion, the company stepped up recruitment efforts in the second half of last year, and the number of employees increased; at the same time, in order to retain high-quality talents, increase employee compensation and implement equity incentives, resulting in an increase of 48% in expenses during the first half of 2023. In terms of R & D investment, the company continued to increase R & D investment, investing 88.4752 million yuan in R & D expenditure in the first half of the year, an increase of 63.40% over the same period last year, accounting for 49.74% of operating income. The company attaches importance to R & D team building. As of 23H1, there were 473 R & D personnel, an increase of 40.36% over the same period last year, accounting for 46.19% of the total population. We believe that with the gradual recovery of the revenue side, the company's overall expense rate is expected to fall, thus releasing a certain degree of profit flexibility.

The completion of the acquisition of Universal Technology, benefiting from the continued promotion of the commercial password policy, the company completed the acquisition of additional shares of Universal Technology in the first half of the year, and is currently entering the period of business integration. According to the company announcement, on June 16, 2023, Beijing Haidian District Market Supervision Bureau approved related matters such as Xinan Century as shareholders of Universal Science and Technology, and issued a new "business license" to Universal Science and Technology. As of that day, the transfer of ownership of the underlying assets involved in the company's issuance of shares and payment of cash transactions has been completed, and the company currently holds an 80% stake in Universal Technology.

According to the China News, the company actively promoted the integration of universal science and technology in the first half of the year, integrating in four aspects: management, products, research and development, and sales. In terms of management, the completion of universal science and technology into the company's office application system, financial management system, customer management system and production management system; in terms of products, the completion of product management system integration, product and technical solution training, the development of multi-industry and multi-scene integration scheme is under way. In terms of research and development, the management of universal science and technology R & D has been switched to the company's PLM system for process management, the page transformation of host control management has been completed, and the integration of OA system and cloud test platform is being carried out; in terms of sales, preliminary product sales policies have been formulated, phased training has been received, and products and plans of both parties have been promoted. We believe that the successful acquisition of Universal Technology on the one hand is expected to help the company expand downstream industry customers, on the other hand, the table will also help to increase the company's current revenue and profit level.

Driven by policy, the promotion of commercial passwords is accelerated. According to the official website of the State password Administration, the newly revised regulations on the Administration of Commercial passwords were revised and adopted at the 4th executive meeting of the State Council on April 14, 2023 and came into force on July 1, 2023. The policy defines the requirements for the use of commercial passwords in key information infrastructure, and emphasizes the need to strengthen the convergence of password application security assessment with national security review and network security level protection system, which has laid a good foundation for the application and promotion of commercial passwords. We believe that, driven by the demand of secret review + Guomi transformation, the industry is expected to usher in the upside of prosperity.

Investment advice:

Principal Century, as a leading provider of information security products and solutions in China, is expected to achieve sustained and rapid growth based on password technology, expanding horizontally from finance to government and enterprise industries, and vertically from passwords to other network security products. We estimate that the company's annual operating income in 2023-24-25 will be 829 million yuan and the net profit will be 2.07 billion yuan and 2.64 billion yuan respectively. Maintain the buy-An investment rating, with a six-month target price of 38.69 yuan, corresponding to a dynamic price-to-earnings ratio of 40 times in 2023.

Risk tips: the promotion of secret review policy is not as expected; the capital expenditure of downstream enterprises is not as expected; the progress of research and development and technology iteration are not as expected.