Events:

According to the 23-and-a-half annual report released by the company, the income of the company in the first half of 2023 was 178 million yuan, an increase of 4.28 percent over the same period last year; the net profit was-28 million yuan, down 209.86 percent from the same period last year; and the non-return net profit was-28 million yuan, down 236.44 percent from the same period last year.

Comments:

2023Q2 achieved revenue of 126 million yuan in a single quarter, an increase of 18.45 percent over the same period last year, a significant improvement over the same period last year; net profit of 5 million yuan, down 82.20 percent; and net profit of 5 million yuan, a decrease of 78.21 percent over the same period last year. The decline in profit is mainly due to the company's continued increase in R & D investment, the increase in employee compensation and the increase in costs caused by the implementation of equity incentives.

The continuous increase in R & D investment is the main reason for the decline in the company's profits. In terms of expenses, the company continued to increase R & D investment in the first half of the year, investing 88 million yuan in R & D expenditure, an increase of 63.40% over the same period last year, accounting for 49.74% of the income. In addition, the company's R & D personnel increased by 40.36% over the same period last year, accounting for 46.19% of the total, sales expenses of 48 million yuan, an increase of 39.67% over the same period last year, and management expenses of 31 million yuan, an increase of 32.17% over the same period last year.

The month-on-month decline in the income of the financial sector narrowed, and demand from the government industry recovered. From a sub-industry point of view, the proportion of corporate finance and insurance is still the highest, with revenue of 101 million yuan, a decrease of 14.18% over the same period last year, and a narrower quarterly decline in income. We believe that as the transformation of Xinchuang's core systems in finance and securities firms is accelerated or will stimulate the demand for commercial password applications in the financial IT industry, the company is expected to benefit. The revenue of the government industry reached 40 million yuan, an increase of 84.24 percent over the same period last year, achieving high growth, mainly due to the recovery of procurement and demand from the data bureau, public security, medical, tobacco, water conservancy and other departments; enterprise income was 37 million yuan, an increase of 18.34 percent over the same period last year, maintaining steady growth.

The acquisition of Universal Technology is expected to further promote performance development. In June, the company completed the acquisition of 80% stake in Universal Technology, adding data security products such as cross-network isolated switching, terminal security control and data security archiving, and enriching data security product features and solutions. We believe that the acquisition of Universal Technology will help to enhance the competitiveness of the company's products in the military and military industries, and is expected to further promote the performance of the company.

Profit forecast and valuation analysis:

Taking into account the gradual recovery of downstream demand of the company and the impact of the follow-up consolidation of Universal Technology, we adjust our previous profit forecast and estimate that the company will have a revenue of 8.41 billion yuan in 23-25, and a net profit of 2.21 million yuan and a net profit of 3.79 million yuan. Maintain the "buy" rating.

Risk hints: market competition intensifies, financial innovation falls short of expectations, and technological development falls short of expectations.