Matters:
The company announced its semi-annual report for 2023. At 2023H1, the company achieved operating income of 712 million yuan, a year-on-year decrease of 14.66%; net profit at the parent level was -415 million yuan, after deducting non-net profit of -430 million yuan.
Ping An's point of view:
The company's overall gross margin declined quite clearly, and the cost ratio rose sharply during the period. 2023H1, the company's gross margin was 50.71%, down 9.27% from the same period last year, mainly due to a decrease in the gross margin of the company's third-party products and security services. 2023H1, the cost rate for the period was 113.02%, up 25.06 percentage points from the same period last year. Among them, the sales, management and R&D expense ratios were 56.64%, 14.36%, and 42.23% respectively, with changes of +14.58, +3.13, and +8.60 percentage points from the same period last year. The increase in the cost rate was mainly due to the decline in the company's operating income and weakening of the scale effect.
Short-term performance is under pressure, and long-term development of the cybersecurity track can be expected. In the first half of 2023, domestic economic demand was still gradually recovering. The overall cybersecurity industry where the company is located maintained a growth trend, but in the context of a weak recovery in the external environment, there was some fluctuation. The company's performance showed some pressure in the short term. Among them, the security products business revenue was 359 million yuan, a year-on-year decrease of 32.53%, which was greatly affected by the external environment. The cybersecurity circuit has broad long-term space. According to the latest data from IDC, China's cybersecurity spending is expected to grow to US$28.86 billion in 2026, and the five-year compound growth rate will reach 18.8%. We see that the biggest demand is still unified threat management. It is estimated that about 60% of domestic spending will still be in this field, the company's competitiveness in this field will also remain at the forefront of the market, and the company's traditional security products will benefit.
Focus on superior products, comprehensive development of products, solutions and services. In terms of basic security products, the company's firewall research and development was rapidly iterated to enhance the overall competitiveness of software and hardware. At the same time, the next generation of WAF was released on a rolling basis to ensure leading market share. In terms of solutions, the company has now developed data security solutions for nine sub-industries, including tobacco, banks, government and public administration, car companies, hospitals, universities, state networks, and operators. In terms of security services, the company has made breakthroughs in various fields such as cloud services, intelligent connected vehicles, data classification and classification, and safe operation. 2023H1 SaaS service revenue increased 25% year-on-year. At the same time, the company actively integrates machine learning and other capabilities to quickly generate and match various industry models, continuously iteratively improve identification accuracy, and strive to provide a new interactive framework for safe operation.
Investment suggestions: The company is an early cybersecurity supplier established in China. The product layout is relatively complete and the technical strength is strong. The company's business shows strong seasonal characteristics. Along with the improvement of the market, the company's operations will improve in the 3rd and 4th quarters, gradually breaking out of the operating trough. Looking at the medium to long term, the company's revenue and performance growth will gradually return to normal levels in the industry. Based on the company's latest financial report and judgment on industry trends, we adjusted the company's profit expectations. We expect the company's net profit from 2023-2025 to be 183 million yuan (previous value was 322 yuan), 312 million yuan (previous value was 447 yuan), and 392 million yuan (previous value was 509 million yuan), EPS was 0.23 yuan, 0.39 yuan, and 0.49 yuan respectively, and PE corresponding to the closing price on August 30 would be 48.7X, 28.5X and 22.7X respectively. We are still optimistic about the medium- to long-term development of the industry and the company, and maintain a “recommended” rating for the company.
Risk warning: (1) The risk of increased competition in the cybersecurity market. In recent years, the cybersecurity industry policy has clearly been favorable, the market size has clearly grown, attracted a large number of new entrants, and market competition has intensified. If it is difficult for a company to stay ahead in terms of products and markets, it may be marginalized by the market. (2) Some business growth may fall short of expectations. It has always been difficult to implement the domestic security service business model. Although the company's business is relatively competitive, there is uncertainty about market expansion. The industrial control and cloud security market is growing rapidly, but the market is still in a state of cultivation, and may fluctuate greatly. There is still great uncertainty about whether it can support performance in the short term. (3) The company's R&D may fall short of expectations. The company is at the leading level in terms of personnel and capital investment among cybersecurity companies. However, in recent years, due to the intensification of competition in the cybersecurity market, competition for talents among enterprises is also heating up. If companies cannot maintain a stable core workforce, they will face tremendous pressure on key technology research and development and development of emerging markets.
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