Event: on August 24, Ruijie Network released its half-yearly report for 2023, announcing that in 2023 H1, the company achieved revenue of 4.831 billion yuan, an increase of 6.82 percent over the same period last year, and a net profit of 140 million yuan, down 46.39 percent from the same period last year.

The gross profit margin of each product line increased steadily, and the large investment in R & D led to short-term pressure on the performance: the company achieved revenue of 2.679 billion yuan in the second quarter of 2023, an increase of 7.18% over the same period last year, and net profit of 20 million yuan, down 86.43% from the same period last year. From a business-by-business point of view, H1 company's revenue from network equipment, cloud desktop solutions and network security products in 2023 totaled RMB 36.56 million respectively, an increase of 11.78% over the same period last year, respectively, an increase of 9.02% over the same period last year. The gross profit margin of the company's business line products continued to increase, with a gross profit margin of 42.36%, 34.55% and 36.3% respectively, an increase of 1.04/9.07/1.83pct over the same period last year. From a market point of view, the overseas market of H1 Company grew strongly in 2023, and the domestic market continued to develop steadily. The domestic and overseas markets achieved revenue of 4343,488 million yuan respectively, an increase of 5.84% over the same period last year. The gross profit margin was 39.86% and 34.67% respectively, an increase of 1.95/7.2pct over the same period last year. From the expense point of view, in 2023, H1, the company expanded its business scale, with management expenses of 234 million yuan, an increase of 25.39 percent over the same period last year, and sales expenses of 732 million yuan, an increase of 15.9 percent over the same period last year. As of June 30, 2023, the company had seven major R & D centers, accounting for 56.18% of R & D personnel and 1351 patents, including 1292 invention patents. In 2023, H1 Company increased R & D investment, increased R & D personnel and labor costs, and R & D expenses totaled 945 million yuan, accounting for 19.57% of business income, an increase of 28.71% compared with the same period last year. The expenditure rate of H1 in 2023 was 39.88%, an increase of 5.8pct. We believe that the gross profit margin of the company's product structure continues to improve and is optimistic about the future development of the company for a long time.

The company's main products include network equipment (switches, routers, wireless products, etc.), network security products (security gateways, next-generation firewalls, security situational awareness platforms, etc.), cloud desktop solutions (cloud servers, cloud terminals, cloud desktop software) and other products and solutions such as IT operation and maintenance, smart classrooms, etc. In terms of product innovation, the company has launched a number of innovative product solutions covering "three networks, one center, one cloud and one classroom": 1) network equipment:

In the field of data center, the AI Fabric intelligent computing center network solution is launched; in the campus network field, the minimalist Ethernet all-optical solution continues to advance to the 3.0stage; in the wireless product field, it releases the Star Wireless 3.0solution, breaks through the network bandwidth bottleneck, and launches Wi-Fi 7 new product AP;2) network security: launched a new generation of firewall products to solve security risks, stronger security protection capability. 3) Cloud Desktop: the Triple engine 2.0 cloud desktop solution has been launched, which brings a new user experience through high-performance and cost-effective GPU, which can comprehensively improve the efficiency of operation and maintenance management and meet the needs of different scenarios such as cloud classroom and cloud office. In terms of market position, relying on continuous innovation and rapid market expansion, the company's product market position continues to be consolidated.

According to IDC statistics, Q1 ranked third in China's Ethernet switch market share in 2023, first in general education industry and wholesale / retail industry, third in data center switch market share, second and third in Internet and operator industry market share respectively, of which operator market share accounted for 24.2%, increasing 6.9pct compared with the same period last year. The market share of enterprise WLAN ranks second, of which Wi-Fi6 products are ranked first in shipments, and ranked first in market share in general education, higher vocational education and service industries respectively. We believe that based on the company's continuous product innovation and stable market position advantages, the company's performance is expected to achieve steady growth.

Steady progress of fund-raising, continuous layout of industrial chain investment integration: steady progress of fund-raising and investment will help the company's future business development: the company's IPO raised a total of 2.208 billion yuan, H1 raised a total of 388 million yuan in 2023, a cumulative investment of 1.883 billion yuan. The 5G cloud small base stations in the main products of the fund-raising commitment projects "R & D and industrialization of New Generation Network Communication equipment" and "Cloud Convergence solution Research and industrialization Project" are mainly used as a supplement to 5G macro base stations. Indoor coverage for 5G network is a new product area of the company. The "data Communication R & D Technology platform" is committed to building a data communication R & D technology platform that supports the development of a new generation of general data communication systems and serves the research and development of network equipment and network security product lines. The total amount of investment raised for the three projects is RMB 9.54 million, respectively, and the investment progress at the end of the period is 79.92pm 91.26pm 97.45% respectively. The "Cloud Convergence solution R & D and industrialization Project" is expected to reach use on September 1, 2023; "New Generation Network Communication Series equipment Research and industrialization" and "data Communication R & D Technology platform" will reach use on January 1, 2024. Actively integrate domestic and foreign investment and accelerate overseas business expansion: 1) on March 1, 2023, the company announced that it plans to invest 262 million yuan in the construction of an innovative digital factory project for the construction of full-process automation production lines for switches, routers and other products to expand production capacity. The construction period of the project is about 10 months and is expected to be completed in December 2023. 2) on March 31, 2023, the company announced that in order to expand its overseas business, it plans to increase its capital to Hong Kong Ruijie, an overseas-owned subsidiary, by US $4.75 million (about 3278. RMB 10,000, converted at the exchange rate at the beginning of March 2023) and through the foreign investment of wholly-owned subsidiaries Ruijie in Hong Kong, Ruijie in Malaysia and Ruijie in Turkey, 12 overseas subsidiaries have been established with a total investment of about 32.84 million yuan. At the exchange rate at the beginning of March 2023). At the same time, the company is actively expanding overseas business markets. in 2023, H1's overseas business sales revenue was 488 million yuan, an increase of 16.36% over the same period last year. The scope of overseas business has been expanded to more than 70 countries and regions, including Asia, Europe, America, Africa and so on. 3) on June 17, 2023, it was announced that it was proposed to set up an industrial fund jointly funded by LP, Xinyuan Investment and natural person Zhong Liming, accounting for 50% (50 million yuan) of the company's investment, and the fund manager was Xinyuan Investment. the fund mainly invests in the new generation of information technology fields related to communications, cloud computing and big data, integrated circuits and software, as well as high-quality innovative enterprises upstream and downstream of the industry. We believe that while steadily promoting the progress of fund-raising, the company continues to accelerate the integration of industrial chains at home and abroad, and the accumulation of industrial projects and the integration of industrial chains are good for the future development of the company.

Profit forecast and investment rating: we predict that the company's 2023-2025 net profit will be 957pm 1.91 billion yuan, the current share price corresponding to PE is 36-27-22 times, the future performance is expected to achieve rapid growth, covering for the first time, given a "buy" rating.

Risk hints: the risk that R & D progress is not as expected, innovation or product renewal is not as expected, market competition risk, market demand is not as expected risk