Event: the company released its 2023 mid-term report on August 17, 2023. 1H23 achieved 310 million yuan in revenue, YoY+12.9%; returned 40 million yuan in net profit, and YoY-18.9%; deducted 30 million yuan in non-returning net profit, YoY-36.1%. Affected by the sales structure, localization, demand-side product price review and other factors, gross profit margin decreased; and the company increased investment in research and development, the overall performance of 1H23 has declined. The comprehensive comments are as follows:

2Q23 revenue increased by 40% year-on-year; many factors affect the level of profit margin. Company: 1) 2Q23 realized revenue of 240 million yuan, an increase of 39.7% over the same period last year, an increase of 248.5% over the same period last year; the net profit of returning to the mother was 40 million yuan, an increase of 1.8% over the same period last year, and the net profit of 1Q23 was-1 million yuan. 2) the 2Q23 gross profit margin decreased by 11.56ppt to 42.8% compared with the same period last year, and the net profit margin decreased by 6.51ppt to 17.5% compared with the same period last year. In the first half of 2023, the comprehensive gross margin decreased by 9.83ppt to 44.8% compared with the same period last year, and the net profit margin decreased by 5.16ppt to 13.2% compared with the same period last year. The decline in 1H23 gross profit margin is mainly affected by sales structure, localization, demand-side product price review and other factors; the decline in net profit margin is mainly due to the company's continued efforts to strengthen research and development, with an increase of 7.35% in the number of R & D personnel and 14.20% in R & D staff compensation (R & D salaries account for 75% of R & D expenses).

The ability of 1H23 cost control has been enhanced; on-hand orders increased by 14.72% compared with the same period last year. In terms of expenses, the company's expense rate during the first half of 2023 was 31.5%, a decrease in 0.90ppt compared with the same period last year. Among them: 1) sales expense rate 5.4%, year-on-year increase of 0.63ppt, mainly due to the increase of after-sales service charges; 2) Management expense rate of 6.5%, a decrease of 1.10ppt compared with the same period last year, mainly due to the reduction of share payment fees and the company suspending the withdrawal of safety production fees according to financial regulations; 3) the rate of R & D expenses was 19.3%, which decreased 0.81ppt over the same period last year. The R & D expenditure was 60 million yuan, an increase of 8.4% over the same period last year, mainly because the company: a) expanded the recruitment of R & D personnel, and the salary of R & D personnel increased by 14.20% over the same period last year (R & D salary accounted for 75% of R & D expenses); b) after the R & D center technological transformation project reached the scheduled usable state, the depreciation expense was increased. Unilaterally, by the end of 2023Q2, the company had orders on hand (including oral) of 530 million yuan, an increase of 14.72% over the same period last year, and obtained 102 new research projects, a decrease of 18.4% over the same period last year.

Receivables increased by 15% compared with the beginning of the year; net cash flow from operating activities improved. By the end of 2Q23, the company:

1) accounts receivable and bills 730 million yuan, an increase of 14.6% over the beginning of the year; 2) inventory of 320 million yuan, a decrease of 6.0% from the beginning of the year; 3) Monetary funds of 80 million yuan, a decrease of 30.5% compared with the beginning of the year, mainly due to an increase in the company's business volume and an increase in operating expenses such as the payment of raw materials, as well as the payment of investment funds from Mingkesi. 4) the net cash flow of operating activities was-50 million yuan (- 80 million yuan in the same period last year), mainly due to the increase in rebates and government subsidies received over the same period last year.

Investment suggestion: the company is the leader of private enterprises in the special embedded computer industry, benefiting from the "14th five-year Plan" equipment information, intelligent development, the company is expected to achieve rapid development. Affected by many factors, such as localization, product price review, increased costs caused by the increase in the size of personnel, the company's performance is under short-term pressure. According to the pace of downstream demand changes, we adjust the company's net profit from 2023 to 2025 to 158 million yuan, 215 million yuan and 290 million yuan, and the current stock price corresponds to 23x/17x/13x for PE in 2023 to 2025, maintaining the "recommended" rating.

Risk tips: lower-than-expected demand, price and profit margin changes, etc.