Events:

The company released the third quarterly report of 2023. In the first three quarters of 2023, it realized operating income of CNY 1.207 billion, with a year-on-year growth of 16.14%; net profit attributable to parent company was CNY-536 million, with a year-on-year decrease of 17.2%, and net profit attributable to parent company after deduction of non-profit was CNY-556 million, with a year-on-year decrease of 16.14%.

As far as Q3 is concerned, Q3 realized operating income of 512 million yuan in 2023, with a year-on-year growth of 1.35%; net profit attributable to mother was-127 million yuan, down 48.56% year-on-year, and net profit attributable to mother after deduction of non-profit was-134 million yuan, down 42.32% year-on-year.

Comment

We believe that the year-on-year growth rate of Q3 revenue of the Company in 2023 has declined compared with the previous two quarters, mainly due to the impact of macroeconomic environment and the repair of downstream budget is less than expected. However, under the challenge of external environment, the orders of key products such as Anhengyun-Tianchi Cloud, Data Security, Xinchuang Security and MSS Custody Operation Service maintained rapid growth, and with the support of MSS Custody Operation Service, the gross profit margin of the Company's security service business increased by more than 4pct. From the downstream specific industries, the company's revenue growth is mainly contributed by operators, central state-owned enterprises and other industries.

The main reasons for the decline in profits are the decrease in gross profit and the increase in R & D expenses. The net profit of the company in Q3 of 2023 decreased by 42 million yuan compared with Q3 of 2022. The main reasons for our analysis are as follows: (Changes in other accounts can offset each other): 1) The comprehensive gross profit rate of the Company in 2023Q3 decreased by 3.01pct year-on-year, resulting in a decrease of gross profit of about CNY 11 million;2) The R & D expenses of the Company in 2023Q3 increased by 20.8% year-on-year, resulting in an increase of R & D expenses of about CNY 33 million. Of which:

Overall gross profit margin decline: Considering that the gross profit margin level of each product line of the Company is relatively stable (among which the gross profit margin of the security service business is lower than that of the product and platform business) and the rapid growth of the Company's security service revenue, we speculate that the decrease in the gross profit margin of the Company is mainly caused by the change in revenue structure.

The increase in research and development expenses: We judged that the main reason was that the Company issued the announcement on the grant results of the 2023 Phase II Restricted Share Incentive Scheme in July 2023, resulting in additional share-based payment expenses in Q3 2023.

Profit forecast and valuation

Considering the slowdown of revenue growth affected by macroeconomic environment in the third quarter of the Company, we adjusted the previous profit forecast, and estimated that the operating income of the Company from 2023 to 2025 will be CNY 2.434 billion, CNY 3.043 billion and CNY 3.796 billion, and the net profit attributable to the parent company will be CNY-1.66, CNY 0.63 billion and CNY 374 million. With reference to the closing price on October 27,2023, the PE corresponding to 2024-2025 is 147 times and 25 times respectively, maintaining the "buy" rating.

Risk hint

The new strategy expanded less than expected; profit recovery was less than expected; downstream customer demand recovered less than expected; market competition intensified.