Incident: The company released its semi-annual report for 2023, with operating income of 712 million yuan, -14.66%; net profit of 415 million yuan, -91.72% of the same period; net profit of non-attributable net profit of -4.3 million yuan; gross margin of 50.71%, year-on-year -9.27 pct. On a quarterly basis, the realized operating income/net profit of 2023 Q2 was 383/-234 million yuan, respectively, -24.59% /- 132.21%, year-on-year; gross profit margin was 40.56%, -17.28 pct.

Comment: Performance is under pressure, and the gross margin of core products is stable. The company's operating income was -14.66%, and net profit was -91.72%, mainly because the company's sales business had seasonal distribution characteristics. H1 added orders and achieved fewer sales revenue, and Q3 orders began to increase. Sales performance throughout the year was concentrated in the second half of the year, especially Q4. At the same time, the company's R&D, marketing and other investments had advanced characteristics, and relatively uniform expenses during the year, resulting in an uneven seasonal distribution of the company's revenue and profit. The H1 gross margin was -9.27 pct year-on-year, which was greatly affected by the decline in Q2 gross margin. Mainly, the gross margin of some third-party products and security services declined a lot, but through supply chain management and strict control of delivery cost rates, the gross margin of the company's core products remained stable.

The company's cost rate increased during the period, and emphasis was placed on R&D investment. In 2023, H1's sales expenses/management expenses/financial expenses were +14.91%/+9.16% /- 117.12%, respectively, and the sales expense rate/management expense rate/financial expense ratio were 56.64%/14.36%/-0.21%, respectively. The cost rate for the period was 70.79%, +16.46pct. R&D expenses were 301 million yuan, +7.16% compared to the same period, and the R&D cost rate was 42.23%. On the R&D tool side, the company has successively built a next-generation security operating system, an intelligent security big data platform, a cloud security centralized management platform, and a smart security operation service platform, providing a public software development platform for the company's products and services.

New data security products have been released one after another, and cloud security orders have increased significantly. Judging from the main business composition, the company's H1 security products/security services/third-party products and services revenue was -31.79% /+8.46%/+682.02% compared to the same period, and security product revenue declined a lot. From the perspective of new security products, in the field of data security, the company released two new products, Green League Data Safe and Green League Data Security Inspection System, with data security coverage exceeding 60%; in the field of cloud security, H1 Company's order amount was 185 million yuan, +20% over the same period. The cloud workload protection platform, which integrates a centralized cloud security management system, cloud native security, and SASE, was selected for the Gartner CWPP innovation insight report; T-oneCloud obtained the industry's first batch of CCRC data security certifications and achieved the government industry and operator industry Launched, the number of users in the first half of the year was +148% compared to the same period.

Profit forecast: The company is an established network security enterprise in China. It is based on technology. In the future, the new security sector will open up a growth ceiling for the company. We predict that the company will achieve a net profit of 197/3.22/435 million yuan in 2023/2024/2025, giving it a “buy” rating.

Risk warning: Industry development, company business progress, profit forecasts and valuations fell short of expectations.