Event

The company released its 2023 semi-annual report that 2023H1 achieved operating income of 104 million yuan (up 10.08% over the same period last year), net profit of 10 million yuan (down 29.14% over the same period last year), and net profit of 9 million yuan (up 0.56% over the same period last year).

For 2023Q2 alone, the company achieved operating income of 67 million yuan (up 0.83% from the same period last year), net profit of 14 million yuan (down 40.82% from the same period last year), and net profit of 13 million yuan (down 32.81% from the same period last year).

Comment

The slowdown in income growth is affected by a weak economic recovery

The company's 2023Q2 revenue growth rate is slower than that of 2023Q1, which we believe is mainly affected by the weak economic recovery. However, from the perspective of industry prosperity, we believe that commercial password industry policies are frequent, and downstream demand is expected to be gradually released as the economy recovers:

In April 2023, the State Council revised and passed the regulations on the Management of Commercial passwords, which came into force on July 1, 2023, emphasizing and improving the secret evaluation of key information infrastructure.

In June 2023, the State Cryptography Administration studied and drafted the measures for the Administration of Commercial password testing institutions (draft for soliciting opinions) and the measures for the Administration of Security Evaluation of Commercial password applications (draft for comments). It is expected to strengthen the management of commercial password detection institutions and standardize commercial password detection activities and security evaluation of commercial password applications. Further implement the promotion of the Commercial password Administration regulations (revised version).

Acquire Jiangnan Science Friends and strengthen the layout of the Financial Industry

The company acquired a 66.93% stake in Jiangnan Keyou for 115 million yuan in June 2023. Jiangnan Keyou has been deeply cultivated in the financial field for many years, and the acquisition of Jiangnan Keyou has strengthened the strategic layout of the financial sector and is expected to increase the company's profits. We believe that in the future, companies are expected to continue to benefit from the commercial password construction of financial institutions:

In 2021, the central bank issued a document requiring banks to change their domestic passwords to 35%, 50% and 100%, respectively.

In 2022, the regulatory document requires that 60% of the trading volume of all securities and futures funds before December 31, 2022 must be protected with domestic passwords.

The transformation of Xinchuang in the financial industry has been continuously promoted, and financial secret reform orders have increased rapidly in 2022, and it is expected to maintain a high boom in the future.

Increase investment in R & D sales, which will disturb profits in the short term.

The company's 2023H1 R & D and sales expenses increased by 22% and 38% respectively compared with the same period last year, increasing market development and recruiting high-level sales talents, while continuing to attach great importance to R & D and continue to introduce high-level R & D talents. The company's short-term investment on the expense side puts some pressure on the profit side.

Continuous layout of emerging areas such as the Internet of things, long-term revenue growth space company 2023H1 has made good breakthroughs in R & D layout in a number of emerging areas:

Internet of things: three Internet of things chips and edge Internet of things devices will be launched in 2023, which can be applied to a variety of Internet of things security scenarios, combined with the advantages of three unreliable security in the cloud to form a comprehensive solution covering the "edge of cloud tube".

Blockchain: the product of blockchain encryption machine is introduced, which is one of the earliest domestic manufacturers to obtain the qualification of blockchain cipher certification. In the future, this product will be widely used in the field of blockchain cipher application construction.

Artificial intelligence: develop a multi-party secure computing platform to support federated machine learning among multi-party users and realize the secure application of machine learning scenarios such as user portraits.

Profit forecast and valuation

Considering that the weak economic recovery in the first half of the year has a certain impact on the speed of the company's business development, and in the long run, the prosperity of the password industry is expected to remain at a high level, we adjusted our previous forecast, the company's operating income in 2023-2025 is expected to be 4.30 pound 572pm 760 million yuan, return to the mother's net profit is 1.33 pound 186 million yuan, refer to the closing price on August 24, 2023. The corresponding price-to-earnings ratio is 48-34-24, maintaining the "buy" rating.

Risk hint

The process of self-development of the Internet of things chip landing is not as expected; the industry competition is intensified; the password industry policy is not as expected; the technical brain drain and so on.