1-3Q23 performance as a whole was lower than we expected, but showed a quarterly improvement trend. The company announced 1-3Q23 results: revenue 275 million yuan, year-on-year-7%; return net profit-208 million yuan, deducting non-return net profit-228 million yuan, loss enlarged over the same period last year. In a single quarter, the company's 3Q23 achieved revenue of 129 million yuan, + 35% year-on-year; net profit of-28 million yuan, deducting non-return net profit of-37 million yuan, and loss narrowed significantly compared with the same period last year. Affected by the macro-economy, the operating conditions of downstream customers and the rhythm of the budget, localization, especially the bidding progress of the government side, is lower than we expected, resulting in overall performance pressure, but the revenue growth angle 1-3Q shows a quarterly improvement trend, profit-end 3Q single-quarter loss has also been significantly narrowed.

Trend of development

In 2023, the pace of localization of the government side is not as fast as expected, and the profit side under the rigid cost is under short-term pressure, which has been improving quarter by quarter. On the revenue side, affected by the macro-economy, the operating status of downstream customers and the pace of budget recovery, the company's overall growth rate in the first three quarters was under pressure, but in a single quarter, the revenue growth rate of 1-3Q was-52%,-12% and 35%, respectively, improving quarter by quarter. From the perspective of gross margin, 1-3Q23 due to the adjustment of income structure, gross margin increased by about 4ppt to 72% compared with the same period last year. On the profit side, due to the rigidity of personnel costs, the sales / management / R & D expenditure rates of 1-3Q23 Company are respectively year-on-year + 14/6/10ppt, and the absolute year-on-year growth rates of expenses are all at a reasonable level of 16% or less. In addition, 1-3Q23 company set aside 21 million yuan of credit impairment loss, under the combined impact of profits under pressure. From the perspective of cash flow, the gap of net operating cash flow of 1-3Q23 company is basically flat compared with the same period last year. Affected by the business rhythm of downstream customers, the fourth quarter is a quarter in which the company does receive and return money. We expect that the revenue end of 4Q23 may continue the trend of quarterly improvement, and the profit side of the whole year is expected to reverse losses.

Wait for the resumption of domestic demand in 2024. We believe that domestic substitution is still a deterministic trend in the medium and long term, and the localization demand of the government side may be repaired in 2024; since the industry entered 2H23, some large single bidding progress has been seen in the open channels, and we expect or will maintain the trend of accelerating penetration, driving the company's revenue growth repair; security emergency business is developing steadily, among which Principal Security business is actively expanding the application of DPI products in AIGC scenarios. AIGC has given rise to new requirements such as data privacy, security vulnerabilities and content censorship. During the reporting period, the company developed product technologies such as deep composite content detection, multimodal content detection and analysis, and anti-fraud modeling. It is recommended that we continue to pay attention to the progress of commercial landing.

Profit forecast and valuation

In the first three quarters of this year, the recovery of downstream government-side and localization demand was slower than expected, affecting the company's performance. We lowered our 2023 debacle revenue forecast for 2024 by 16.4% to 1.36 billion yuan, while expenses were under pressure at the profit end of the rigid end. We downgraded the 2023 debacle's 2024 profit forecast of 69.6% to 0.92 billion yuan, maintaining an industry rating that outperformed. After cutting the target price by 6% to 23 yuan (switching to 45 times 2024 P / E valuation), there is 14% upside compared to the current share price, which corresponds to 42 times 2024 Pmax E.

Risk

The progress of domestic substitution is not as expected, and the risk of market competition.