Netsu Technology deducted non-net profit by +103.1% in the first three quarters, slightly exceeding market expectations. The company announced its results for the first three quarters of 2023: revenue -5.9% to 3.52 billion yuan, net profit to parent +142.8% to 4.3 billion yuan, and net profit after deducting non-net profit +103.1% to 290 million yuan. In the third quarter alone, revenue was -1.1% year-on-year to 1.19 billion yuan, +2.8% month-on-month; net profit to parent was +89.7% to 170 million yuan, +2.6% month-on-month; net profit after deducting non-net profit +44.1% year-on-year to 110 million yuan, -28.5% month-on-month. Benefiting from a significant improvement in gross margin, the company's performance slightly exceeded market expectations.
Development trends
Business is progressing steadily, and gross margin continues to rise. The company maintained steady development in the first three quarters, and the decline in revenue narrowed in the third quarter. The company continues its market strategy of balancing revenue and profit in the CDN business, actively expands overseas, and promotes CDN innovation in the direction of edge GPU computing power platforms and cloud security. In September, the sub-brand Netsu Security established the “Martial Arts Laboratory” to continuously improve security attack and defense capabilities. The company's gross margin increased 5.7 ppt to 30.7% year on year in the first three quarters, and gross margin increased 3.8 ppt to 32.4% year on year in the single third quarter, 1.7 ppt month on month, and gross margin recovered quarterly. We believe that with the expansion of the CDN business overseas and the steady progress of the new business layout, it is expected to boost revenue and increase gross margin levels.
Expenses have stabilized and profitability has improved. The company's total three fees for the first three quarters were +5.9% year-on-year to 900 million yuan, and the sales/development/management expenses ratio was +1.6/+0.1/+1.2ppt to 8.7%/10.0%/6.8%, respectively; the total three fees for the third quarter were -4.0% year-on-year to 290 million yuan, -6.0% year-on-year. Benefiting from improved gross margin and stable expenses, the net profit margin for the first three quarters was +7.4ppt to 12.1% year on year, and the net gross margin for the third quarter was +6.7ppt to 14.1% year on year, which was the same month-on-month. Excluding effects such as subsidiary disposal income, non-current asset disposal losses, and wealth management product income, etc., the non-net interest rate deducted in the first three quarters was +4.5ppt to 8.4% yoy, and the non-net interest rate deducted in the third quarter was +2.8ppt to 9.1% yoy, and -4.0ppt month-on-month. Cash flow from operating activities for the first three quarters was +140 million yuan to 720 million yuan; the single third quarter was -170 million yuan year-on-year, and -40 million yuan over the previous year. New operating assets/liabilities for the current period changed +4.3/+210 million yuan year-on-year.
Equity incentives demonstrate confidence in steady growth. The company announced the 2023 restricted stock incentive plan (draft) in August. The incentive plan plans to grant a total of 32 million restricted shares to incentive recipients, accounting for 1.3% of the total share capital of the company at the time the incentive plan was announced. The grant price is 3.37 yuan per share. The performance assessment target is net profit for 2023 (return net profit excluding exchange gains and losses and the company's share payment expenses for equity incentives during the validity period) of not less than 300 million yuan. The total net profit for 2023/2024 is not less than 6.1 billion yuan. The company expects to generate amortization of RMB 19.04/6,360/19.44 million yuan from 2023-2025, and actual amortization of RMB 4.598 million in the 3rd quarter.
Profit forecasting and valuation
Maintaining the outperforming industry rating, considering the uncertainty of revenue recognition during the business promotion process, the 2023/24 revenue was lowered by 14.9%/25.4% to 50.8/5.34 billion yuan. Due to improved gross margin and improved operating quality, net profit for 2023/24 was increased by 83.9%/63.4% to 55/ 650 million yuan. Considering the decline in market risk appetite under fluctuations in the macro environment, the target price is maintained at 9.4 yuan. Based on 42x/35x 2023/2024P/E, the current stock price corresponds to 29x/24x P/E in 2023/2024, and has 44.8% room to rise.
risks
Competition in the CDN market has intensified, and new business development has fallen short of expectations.