The company's performance in the first half of 2023 grew rapidly, domestic and foreign market projects were signed and executed comprehensively, and the network visualization business recovered strongly. Looking ahead to the whole year, with the continuous improvement and implementation of the cybersecurity policy system, network visualization is expected to usher in a recovery as a part with immediate construction needs. Furthermore, data elements, generative AI applications, etc. also provide catalysts for network visualization construction. We expect industry demand to gradually recover and the company's performance is also expected to pick up. Maintain the “increase in holdings” rating.

Matters: The company released its 2023 annual report. In the first half of the year, it achieved revenue of 310 million yuan (yoy +108.49%), net profit of 74 million yuan (yoy +169.96%), and net profit of 48 million yuan (yoy +144.87%) after deducting net profit from non-return income.

Project signing and execution have been comprehensively promoted, and revenue has grown rapidly. In the first half of the year, investment and construction demand from the government, operators, enterprises and institutions in the fields of infrastructure network construction and network information security was gradually released, demand in the network visualization industry gradually recovered, demand in overseas markets increased, the company made every effort to promote project signing and execution in domestic and foreign markets, and achieved rapid revenue growth. By product line, broadband networks achieved revenue of 204 million yuan (yoy +199.26%), mobile networks achieved revenue of 51 million yuan (yoy +50.43%), and network content security achieved revenue of 210 million yuan (yoy +45.42%). The company continuously optimized product performance and structure. Software products accounted for a relatively high share of sales products, and the gross margin of broadband network products increased by 7.92 pcts to 93.44%.

Explore customer needs, and continuous R&D investment reflects development confidence. In the first half of the year, the company's sales, management and R&D expenses were 0.94/0.37/114 million yuan respectively, yoy +15.38%/+4.44%/-7.04%. The company continues to track the development of the industry. While adhering to traditional market investment, it also iteratively optimizes products from the market demand side, and invests manpower and material resources in pre-research and development of new products. In the first half of the year, R&D investment accounted for 36.83% of revenue, and the number of R&D personnel reached 686, accounting for 54.84% of the total number of people in the company. For broadband network products, the company launched a new generation of autonomous and controllable product architectures and solutions, upgraded products such as convergence and shunt; for mobile network products, it restructured and optimized software and hardware platforms for fixed/mobile products, and launched integrated and miniaturized fixed collection products integrating multiple formats.

Combined with catalysts such as cybersecurity, industry demand is expected to be released at an accelerated pace. In recent years, the cybersecurity policy system has been continuously improved, and the company's network visualization business has benefited from increased demand for traffic collection and analysis brought about by the development of the cybersecurity industry. In terms of smart public security, during the “14th Five-Year Plan” period, smart policing scenarios such as data collection for 5G mobile networks, traffic analysis of 5G broadband networks, and analysis and mining of massive police big data will enter the stage of rigid demand construction in mobile communication network data collection and broadband network traffic analysis. We anticipate that the company's network visualization business requirements will gradually resume in the future. Furthermore, the contracts in hand provide a solid foundation for the recovery of the company's performance. On July 5, 2022, Syke Technology, a wholly-owned subsidiary of the company, and China Telecom Digital Intelligence Technology Co., Ltd. signed a procurement contract with a total amount of 53 million yuan. On September 23, the company announced that Syke Technology and China Mobile Communications Group Co., Ltd. signed a procurement contract with a total amount of 198 million yuan.

Risk factors: The recovery in government and operator market demand falls short of expectations; industry competition is intensifying; and the company's new product development and implementation progress falls short of expectations.

Profit Forecast, Valuation and Rating: Maintain the company's net profit forecast of $1.54/196/248 million for 2023-25. Combining business attributes, Hengwei Technology, Dipu Technology, and Haohan Deep were selected as comparable companies. The average PE of the comparable company Wind unanimously anticipated in 2023 was 54 times. Considering that the company has a layout in the front and back end of the network visualization industry, we gave the company 55 times PE in 2023, corresponding to a target market value of 8.5 billion yuan and a target price of 50 yuan. Maintain the “increase in holdings” rating.