At present, with the rapid development of digital economy, password is the key core technology to ensure information security. in recent years, relevant policies and regulations on commercial secret have emerged frequently, and the security evaluation of commercial password application has become a national norm, superimposed on the relevant requirements of national secret transformation. Dual-driven industry ushered in the tuyere period. The company has been deeply engaged in the business secret field for 15 years, and the company completed mass production of its first self-research chip XS100 in 2022, indicating that the company has cut into the upper reaches of the commercial password industry chain, initially satisfied with the import substitution of self-use chips, significantly reduced cost and efficiency, continued innovative application scenarios in the future, and gradually sank the small and medium-sized market, which is expected to become a new growth pole of the company. Recently, the company completed the 66.93% equity acquisition of Jiangnan Keyou, which helps to accumulate high-quality customer resources in the industry and innovate and subdivide application scenarios. Cover for the first time, giving a "buy" rating.

Company profile: China's leading provider of commercial secret products and solutions, the performance continues to increase. Founded in 2008, the company is a leading provider of commercial password products and solutions in China. The company has been deeply engaged in the commercial secret field for 15 years and has a wide layout of product lines. the main products include password chips, password boards, password machines and password systems, and fully support domestic cryptographic algorithms to actively promote the localization process of Xinchuang. In recent years, while serving downstream network security manufacturers, the company has also actively expanded its customers in the industry, directly driving the company's high performance. With its excellent cost control and profitability, the company achieved revenue of 2.02 million yuan in 2020-22, compared with + 51.36%, 33.51% and 25.69%, respectively. The net profit of return to home is 0.52 million yuan, which is + 155.42%, 42.81% and 43.52% compared with the same period last year.

Industry profile: under the double demand drive of secret review superimposed state secret transformation, the industry ushered in the tuyere period. Password is the key technology to ensure information security in the era of digital economy. China's commercial password market has a broad space and the growth rate is higher than the global level. According to the Digital economy Development Plan of the 14th five-year Plan, the scale of China's commercial secret market will exceed 100 billion yuan in 2025. At present, the industrial competition pattern is decentralized, and there are a large number of employees and most of them are small and medium-sized enterprises with low market share. With the promulgation of the password Law in 2019, the relevant policies and regulations of the cryptographic industry have emerged frequently in recent years, and the commercial password application security evaluation of key information infrastructure (hereinafter referred to as "secret review") has become a mandatory national standard. At the same time, under the background that international cryptographic algorithms have been repeatedly cracked, it has become a general trend to use domestic cryptographic algorithms instead of international algorithms to ensure the security and self-control of national data. Various industries have issued relevant policies one after another, and the penetration rate of commercial passwords has been increasing. In the future, with the accelerated promotion of secret review and the transformation of State Secret, the demand for password products in emerging industries such as superimposed cloud computing, Internet of things, block chain and so on will expand, and the industry will usher in a tuyere period, which is beneficial to the development of commercial and secret enterprises.

Competitive advantage: self-developed chips to create a new growth pole, competitive barriers continue to thicken. The company began to lay out independent research and development of password security chips in 2015, and the first self-developed chip XS100 series completed the first batch of mass production and generated export revenue for the first time in 2022. In August 2023, the company released three self-developed chips, XR100, XT100 and XT200, which effectively solved the problem of dependence on chip imports and ensured the security and stability of the supply chain. At present, the comprehensive performance indicators of XS100 chips are at the advanced level in the industry as a whole, and have been used in the company's password boards, password machines and other products. One chip can replace six chips, including FPGA, DSP and algorithm chips, significantly reducing cost and power consumption, and is expected to become a new growth pole of the company's performance in the future. At the same time, the company pays attention to personnel training, continues to increase R & D investment in recent years, establishes industry-university-research cooperation with universities, introduces R & D talents, and focuses on cryptographic technology innovation and breakthrough, and is committed to thickening core competition barriers.

In addition, the company recently announced the completion of the 66.93% equity acquisition of Jiangnan Keyou. With the help of Keyou's years of accumulation in the field of financial segmentation, the company will be able to accumulate high-quality industry customer resources and innovate richer application scenarios in the future. the penetration rate of company password products in the financial field is expected to be improved.

Risk factors: the risk of intensified competition in the industry; the risk that downstream demand is lower than expected; the risk that customer expansion is not as expected; the risk that core technological innovation is not as expected; the risk of seasonal fluctuations in operation; the risk that the progress of obtaining product qualification is not as expected.

Profit forecast, valuation and rating: during the "14th five-year Plan" period, the party and the state attached great importance to data security. With the formal introduction of "Commercial password Management regulations", the industry ushered in the tuyere period. The company has been ploughing for many years and occupies a leading position in the commercial password industry, and the business of password board, password machine and password system is expected to achieve stable growth; at the same time, the company has made great efforts to develop its password chip business and has launched four self-developed password chips. the competition barrier is thick, which is expected to be the new growth pole of the company's performance. We estimate that the return net profit of the company from 2023 to 2025 will be 1.41 million yuan, 1.91 million yuan, respectively, and the corresponding EPS forecast will be 1.23 million yuan, respectively. Combining the absolute valuation method and the relative valuation method, we will give the company a target price of 85 yuan, covering it for the first time and giving it a "buy" rating.