Event: On August 29, 2023, the company released its 2023 annual report. 2023H1 achieved revenue of 1,144 million yuan, a year-on-year decrease of 15.49%; net profit attributable to the mother - 115 million yuan, an increase of 5.72% over the previous year; net profit after deducting non-return net profit - 08 billion yuan, which changed from profit to loss year-on-year. The performance is in line with market expectations.

Key points of investment

Q2 The revenue growth rate recovered month-on-month, and R&D investment continued to increase: 2023Q2's quarterly revenue was 730 million yuan, up 4.08% year on year; net profit for the first quarter was 52 million yuan, up 3.42% year on year. The month-on-month growth rate of revenue has recovered. By product, 2023H1's cryptographic products achieved revenue of 586 million yuan, an increase of 10.79%; cybersecurity products achieved revenue of 484 million yuan, a year-on-year decrease of 33.94%; and data security products achieved revenue of 73 million yuan, a year-on-year decrease of 19.66%. 2023H1's gross profit margin was 42.95%, an increase of 10.92 pct over the previous year. We believe this was mainly due to the decrease in the company's share of integrated business in the first half of the year. In terms of expenses, 2023H1's sales expenses, management expenses, and R&D expenses were 182 million yuan (yoy -7.33%), 99 million yuan (yoy 10.36%), and 212 million yuan (yoy 38.50%), respectively, and continued to increase investment in product development.

Cryptographic products and ecosystems continue to be enriched, and customer breakthroughs have been achieved. On the product side, a low-power cryptographic security chip has obtained a new commercial cryptographic product certification certificate, and an ultra-high performance reconfigurable cryptographic chip has completed key technical research and product projects; the Longxin Security SE series has added two new models to support more domestically produced CPUs. The trusted computing cryptographic module has been adapted to the first security product, which can meet the “trusted verification” technical requirements of Daozhou; full-scenario cryptographic application capabilities are progressing steadily in the fields of vehicle networking, satellite Internet, and Beidou satellite. This year, the company focused on expanding market segments such as public security, nuclear power, water transportation, social security, and education. It won the bid for China Telecom's first batch of cryptographic service product collection projects, and achieved a breakthrough in the telecom operators' cryptographic services market.

The data security business continues to expand to central enterprises and car enterprise customers: Since this year, the company has continued to promote the formulation of more than 10 national data security standards and policies, forming multiple solutions from different perspectives such as national data security supervision, data security risk monitoring, and management and control of domestic and foreign enterprises, and has built integrated data security service capabilities from consulting and evaluation, technical protection and management system improvements.

In terms of customer development, the company continues to expand the cross-border data business of central enterprises, promote the implementation of data security solutions for typical scenarios such as cross-border data protection for central enterprises, and fully participate in the cross-border data protection pilot projects of eight central enterprises, including CNOOC and China Merchants Bureau, and has made new progress. For the first time, we have achieved data security business cooperation and project delivery with GAC, helping car companies achieve intelligent and specialized data security.

Profit forecast and investment rating: We maintain the company's 2023-2025 EPS forecast of 0.48/0.62/0.79. As a national data security team, the company will fully benefit from data security and the promotion of market-based data elements. Maintain a “buy” rating.

Risk warning: Competition in the industry is intensifying, and policy progress falls short of expectations.