Performance temporarily fluctuated during the restructuring and optimization process. In the first half of 2023, the company's total revenue was 373 million yuan, a year-on-year decrease of 2.94%. Among them, revenue from border security products and services was about 262 million yuan, up 1.18% year on year, accounting for about 70.2% of total revenue; revenue from cloud security products and services was 21.255 million yuan, down 18.78% year on year; revenue from other security products and services was 86.6066 million yuan, down 5.67% year on year. In the first half of 2023, the company's gross margin was 61.72%, down 9.85 percentage points from the previous year. The decrease in gross margin was mainly due to an increase in the share of the security integration business compared to the same period last year; after excluding the security integration business, the company's gross margin was 68.92%, which is slightly higher than the overall gross profit margin for the whole of last year.

Affected by factors such as falling revenue and gross margin, and the company's increased investment in R&D, the company had a net loss of about 112 million during the reporting period, compared with a net loss of about 77.03 million in the same period last year.

Per capita sales output and repayment management have improved markedly, and measures to remedy shortfalls are beginning to bear fruit. In the first half of the year, after Shenzhou Digital took stock, the company took the initiative to adjust the strategic plan, clarify strategic goals, and set the pace of implementation. The company formulated the four major policies of “Innovation Campaign,” “Business Opportunity Management,” “Chip Strategy,” and “Ecological Upgrading,” and clarified the “four divisions and one center” sales system, focusing its work on adjusting and optimizing the internal organizational structure around improving efficiency per capita. In the first half of 2023, the company's per capita output of sales staff increased by about 29.74% year on year, and sales repayment increased by about 33% year on year. The healthy increase in per capita output is a positive sign. The company has achieved initial results in key management directions such as repayment management and personnel efficiency improvement. Shenzhou Digital's refined operation and management experience is being passed on to Shanshi Network Technology to speed up the completion of the company's historical shortcomings.

Continue to focus on deploying the credit innovation market. In the first half of 2023, the company added four mid-range and five 2U A-series intelligent next-generation firewalls, and launched localized firewall products K1280 and K6580 based on domestic chips, which can cover 2Gbps-100Gbps application scenarios, as well as a variety of border security products based on domestically produced key components for intrusion detection and prevention systems. In terms of data security, the company released a domestic database audit and protection system to ensure that the system itself is safe, autonomous and controllable. In terms of application security, the company has added 5 new hardware platforms, 3 of which are based on domestic chips, and plans to add 3 web application firewall hardware platforms based on domestic chips.

In terms of products, the company has launched 7 Xinchuang products according to the plan, and will launch 26 Xinchuang products in 2023, covering 16 categories. In terms of innovation ecology, the company has signed strategic cooperation agreements with domestic basic software and hardware vendors such as Tongxin, Longxin, and Haiguang, etc., and has cooperated with many upstream vendors in the Xinchuang field in various areas such as product solutions, compatibility adaptation, and security protection cooperation, and has strengthened cooperation through the establishment of joint laboratories and adaptation centers. The company has further clarified the innovation development strategy and plan, enhanced customers' awareness of the company's innovation capabilities, opened up sales channels for communication and innovation products, and accelerated the expansion of the integrity of the Xinchuang business line. It will basically cover all product categories of the company and meet the company's innovation market development needs.

The company positions self-developed chips as a “chip strategy.” In 2021, the company officially launched self-developed security chips. Up to now, it has completed research and development at the FPGA technology stage and released two firewall products equipped with FPGA technology. Through security chip hardware acceleration technology, this product can achieve 200Gbps of packet processing capacity on a 1U box. FPGA products have been launched on the market one after another in 2022, and received good customer feedback. Based on FPGA chip technology, the company is currently developing ASIC chip technology and is planning 22 firewall products equipped with ASIC chips. It is expected that at the end of 2023, the company will launch the first release of ASIC chip technology, and a firewall platform compatible with ASIC chips is also being developed simultaneously. If the streaming is successful, the company is expected to launch a firewall product with self-developed ASIC chip technology in 2024. The application of ASIC chip technology will provide better port capacity and greatly improve the cost performance ratio of the company's products, form a product cost performance advantage in low- and middle-end traffic scenarios, and achieve a differentiated competitive advantage in the innovation market. At the same time, the company's self-developed controllable security chip technology will further enhance the performance, stability and supply chain reliability of the company's localized products.

Investment advice. We expect that in 2023-2025, the company achieved revenue of RMB 1,043 (-1%)/13.87 (-2%) /19.02 (-2.8%), and realized net profit of RMB -63.97 million (originally -64.52 million), 6365 million (-8.9%), and RMB 174 million (-6.5%), respectively. After Shenzhou Digital took a stake in the company, the pain caused by the restructuring was a short-term situation. We are optimistic about its long-term stable development. Therefore, taking into account factors such as the company's strength in the field of network security hardware architecture and security chips, and future market expectations, we gave the company 5 times PS in 2023 (unadjusted), then the target market value was 5.213 billion yuan (-1.1%), and the target price was RMB 28.92 per share (-1.1%), maintaining the “superior to market” rating.

Risk warning. Factors such as the company's restructuring fell short of expectations, affecting revenue growth and falling short of expectations; the company was affected by the competitive environment in the market and its gross margin fell, leading to a decline in profitability; the company's security chip research and development progress fell short of expectations, or was affected by foreign technology-restrictive policies; and a sudden cybersecurity incident affecting the company's brand.