1H23 performance is in line with expectations

Neusoft Group announced 1H23 results: achieved revenue of 3,890 million yuan, +15% year on year; net profit of 95 million yuan, +15% year on year; net profit of 27 million yuan after deducting non-return net profit of 27 million yuan, +128% year on year. Looking at the second quarter alone, realized revenue of 2,233 million yuan, +6.1% year on year, net profit attributable to mother was 90 million yuan, -20.5% year on year, net profit after deducting non-return net profit of 54 million yuan, -32% year on year. The company's 1H23 revenue and profit sides grew steadily, and the overall performance was in line with our expectations.

Development trends

Revenue growth is steady, and the medical and automotive industries maintain leading positions in the industry. Look at 1H23 by business line:

The company's healthcare sector revenue was +36% year over year, helping 16 additional hospital customers pass the electronic medical record level 5 and above review, and maintain the highest market share in the field of health insurance informatization according to IDC data; revenue from the smart car sector was +19%, which maintained steady growth in an objective external environment where demand for automobile consumption was weak; revenue of the subsidiary Neusoft Ruichi 1H23 surged 61% year on year. The profit side is steadily improving, and the subsidiaries Xikang and Wanghai have clearly reduced their losses. 1H23's gross profit margin, management and R&D expenses ratio remained stable compared to the same period last year. The sales expense ratio decreased slightly by 0.9 ppt year-on-year, and the overall profit side maintained steady growth. Among subsidiaries, 1H23 Neusoft Healthcare maintained stable profits, while Xikang and Wanghai reduced losses by 38% and 59% year-on-year respectively, and business conditions gradually improved. We believe that the company's 1H23 business is improving steadily and is expected to maintain a steady growth trend throughout the year.

The big health sector is actively deploying AI+ healthcare and is expected to benefit from data elements. In June of this year, the company launched Tianyi's big model in the medical field, as well as various AI+ medical industry applications, including the Flying Biao Medical Image Labeling Platform 4.0 and a web-based virtual endoscope. In addition, it also established the Neusoft Magic Technology Research Institute. The company plans to continue exploring and implementing LLM system engineering strategies. The construction of the data element market continues to accelerate. Recently, policies related to data entry have been introduced, and all regions are actively promoting public data openness and authorized operation pilot projects. We believe that the company has a leading market share in the construction of national, provincial and municipal health insurance platforms, and is expected to continue to benefit from subsequent exploration of the data element market in the medical field. We recommend continuing to pay attention to the implementation progress of subsequent AI vertical model applications and data element operations. Promote the localization of domain controllers for autonomous driving. On 1H23, the subsidiary Neusoft Ruichi further strengthened the innovative integration of domestic chips and automotive software technology, built the first “nationally produced” autonomous driving domain controller platform, and realized the full development and mass production of localized chips, algorithms, software, and hardware.

Profit forecasting and valuation

The company's performance is steady and improving. We have kept our 2023/2024 revenue and profit forecast basically unchanged, maintaining an outperforming industry rating and a target price of 15 yuan (based on 2023 SOTP, corresponding to 58/31 times the 2023/2024 price-earnings ratio), which has 59% upside compared to the current stock price. The current stock price corresponds to 37/20 times the 2023/2024 price-earnings ratio.

risks

The expansion of new orders fell short of expectations; innovative business subsidiaries continued to lose money; and market competition intensified.