Incident Overview
On August 24, Sanwei Xin'an released its semi-annual report for 2023. In the first half of 2023, the company achieved operating income of 104 million yuan, an increase of 10.08% over the previous year; realized net profit of 10.1393 million yuan, a year-on-year decrease of 29.14%; net profit after deducting non-return net profit of 8.5808 million yuan, an increase of 0.56% over the previous year.
Performance was fluctuated by downstream demand, and sales and R&D expenses continued to increase on the revenue side. In the first half of 2023, the company achieved revenue of 104 million yuan, an increase of 10.08% over the previous year; in Q2 alone, the company achieved revenue of 67 million yuan, an increase of 0.83% over the previous year. By product, 1) the company achieved revenue of 41.48 million yuan for the first half of the year, a year-on-year decrease of 11.55%; 2) Cryptographic system revenue of 32.24 million yuan, an increase of 6% over the previous year; 3) Cryptographic board revenue of 17.75 million yuan, an increase of 46.07% over the previous year; 4) Cryptographic chip revenue of 5.65 million yuan. We believe that the slowdown in the company's growth rate in the first half of the year, especially in the second quarter, was mainly due to: 1) seasonal fluctuations brought about by the pace of downstream procurement; 2) the profitability of downstream government and enterprise customers was under pressure and demand slowed down. On the cost side, the company's gross margin for the first half of 2023 was 70.92%, compared to -4.02pcts in the same period last year. We believe this is mainly due to fluctuations in the revenue structure. On the profit side, the company's net profit declined year on year, mainly due to the slowdown in revenue growth in the first half of the year and the fact that expenses were more rigid. The company increased investment in R&D and sales in the first half of the year. The sales/R&D expense ratio was 29.75%/35.50%, respectively, +5.95/3.52 pcts over the previous year.
Acquire Jiangnan Keyou and actively expand the financial sector
On June 29, the company completed the acquisition of Jiangnan Keyou, which currently accounts for 66.9349% of its shares.
Judging from the financial situation subject to the acquisition, Jiangnan Keyou's revenue in 2022 was 118 million, net profit was 22 million, and net assets of 76 million yuan. Overall, the financial situation is quite good. This year, the merger will be achieved, and the company's performance is expected to increase in the second half of the year. Judging from the product layout, according to Jiangnan Keyou's official website, its main products are cryptographic machines and cryptographic systems, including cryptographic related products such as host security equipment, terminal security modules, password service infrastructure, key management systems, host operation and maintenance audit systems, and database operation and maintenance audit systems. Looking at the downstream sector, Jiangnan Keyou's cryptographic solutions are mainly used in financial fields such as banking, insurance, and securities. Cryptographic applications in important industries such as finance occupy a dominant position and enjoy a good reputation in the industry. We believe this acquisition will further expand the product matrix of its cryptographic systems business, and help the company further expand its financial sector customers with a stable supplier ecosystem, combine the company's own cryptographic chip and cryptographic board business, and leverage business synergies.
There are frequent policies related to secret reviews. The boom is expected to continue to pick up in the second half of the year. On May 24, the revised “Commercial Password Management Regulations” were officially announced to the public (State Council Order No. 760) and officially implemented on July 1, 2023. This policy further highlights the importance of the critical industry, which is currently the main payer of cybersecurity, and the demand for confidential reviews is expected to be guaranteed. Furthermore, on June 9, the National Secret Service drafted the “Administrative Measures on Commercial Password Inspection Agencies (Draft for Comments)” and the “Administrative Measures on the Security Assessment of Commercial Password Applications (Draft for Comments)”. In the short term, there are frequent policies related to secret reviews, and industry sentiment continues to rise.
In the long run, commercial secrets serve as the foundation for AI, data elements, and data security. It has a wide range of applications and broad space.
Investment advice
The company is the only manufacturer in the commercial secrets industry to achieve vertical integration, and is scarce. The company has strong R&D capabilities. It started in the high-barrier board/machine sector in the commercial security industry. Self-developed chips bring cost and performance advantages, and downward expansion of the system opens up room for growth. We believe the company is expected to enjoy the dividends brought by the accelerated development of the industry in the short, medium, and long term. Furthermore, the company's high-performance self-developed chips have opened up the IoT market, built a second growth curve, and performance is expected to grow rapidly. We expect the company's operating income from 2023 to 2025 to be 482/676/884 million yuan, and net profit to parent to be 167/222/276 million yuan, respectively. Maintaining the buy-A investment rating, the 12-month target price is 68.25 yuan, which is equivalent to a dynamic price-earnings ratio of 35 times 2024.
Risk warning: The implementation of the policy fell short of expectations, industry competition intensified, and the implementation of cryptographic chips fell short of expectations.