Events:

According to the annual report of 2023, the company achieved 442 million yuan in operating income in the first half of 2023 (up 20.15% from the same period last year), 39 million yuan in net profit (down 3.98% from the same period last year), and 35 million yuan in net profit after deducting it (up 14.29% over the same period last year).

For 23Q2 alone, the company achieved operating income of 211 million yuan (year-on-year increase of 36.78%), net profit of 7 million yuan (year-on-year increase of 255%), and non-return net profit of 4 million yuan (year-on-year increase of 125%).

Comments:

From the perspective of product structure, the revenue of network security products, application delivery and network products, security services and other products is 326 million yuan, 87 million yuan and 30 million yuan respectively, up 39.42%,-15.29% and-6.61% respectively over the same period last year. Among them, the sales revenue of network security products, including security inspection, security protection, security analysis / audit and security platform, increased rapidly in the first half of 2023. We believe that the main reasons are: 1) the country gradually attaches importance to network security, and with the formal implementation of the "Guanji Protection requirements" in May 23, the localization of information technology has become a trend. the demand for network security has been released; 2) the company has built a new generation of software and hardware platform, and the performance of domestic products has been greatly improved to meet the new needs of localization scenarios.

From the distribution of downstream customers, the revenue of company operators, government and public utilities are 150 million yuan, 142 million yuan and 78 million yuan respectively, accounting for 34.01%, 32.14% and 17.58% respectively, up 27.84%, 16.21% and 3.44% respectively over the same period last year.

The company achieved rapid growth in operating income in the first half of 2023, and we believe that the main reasons are: 1) 2022H1 revenue decreased by 14.98% compared with the same period last year, resulting in a low base; 2) the company expanded against the trend in 2022 and achieved effective transformation of pre-investment in sales and research and development, which promoted income growth.

The pick-up trend of gross profit margin continues and the profitability is sound.

In terms of gross profit margin, the company's gross profit margin reached 67.48% in the first half of 2023, an increase of 1.58pct compared to 2022H1; in terms of Q2 alone, the gross profit margin was 65.04%, an increase of 1.64pct compared to the same period last year. It can be seen that the company's profitability has stabilized and rebounded, and the negative impact caused by fluctuations in raw material procurement costs has been gradually eliminated, and the trend of gross profit margin recovery is strong. Among them, the gross profit margin of network security products reached 71.74%, compared with the same period last year to improve 3.48pct, the product advantage is solid.

At the same time, considering the seasonal impact of revenue recognition, the cyber security industry suffered a general loss in the first half of the year. The company achieved profits in the first half of the year, highlighting the sound profitability, mainly due to the company's product power and technical barriers are prominent.

With the continuous improvement of the market, we believe that the company still has obvious advantages in 5G, cloud security, industrial Internet security and data security, and can maintain the good profitability of the company's business.

Actively increase sales and improve management, is expected to further expand the market. From the cost side, in the first half of 2023, sales / R & D / management expenses increased by 34.95%, 5.92% and 20.67% respectively compared with the same period last year. The corresponding sales expense rate increased 4.6pct, while the R & D expense rate reduced 3.7pct. On the whole, the company's three major expense rates remain stable as a whole, and the cost input structure is tilted to sales. The reason for the substantial increase in sales expenses is mainly due to the expansion of the sales staff and the increase in staff salaries and business hospitality expenses. This reflects the company's intention to respond to the surge in market demand, implement a positive sales strategy and enhance the development of management.

We believe that the strategic investment based on the market can help the company to seize the downstream market in time at the window of the policy dividend, and the company's profits in the second half of the year are expected to continue to be released.

Profit Forecast and valuation Analysis

Considering that the company is expected to continue to promote the counter-trend expansion strategy in 2023, and revenue growth is expected to recover, we predict that the company's operating income from 2023 to 2025 will be 11.02,13.25 and 1.572 billion yuan, and the return net profit will be 2.49,3.23 and 391 million yuan. With reference to the closing price on August 17, 2023, the corresponding PE is 42, 32, 26 times, maintaining the "buy" rating.

Risk hint

The budget input of downstream customers is lower than expected; structural changes have taken place in market demand; technology secrecy and core technology brain drain; competition leads to a reduction in gross profit margin.