occurrences

The company released its 2023 three-quarter report. The first three quarters of 2023 achieved operating income of 1,207 billion yuan, a year-on-year decrease of 13.04%; net profit of net income of 524 million yuan, a year-on-year decrease of 105.39%; net profit after deduction of 545 million yuan, a year-on-year decrease of 95.35%.

In terms of Q3 alone, 2023Q3 achieved operating income of 495 million yuan, a year-on-year decrease of 10.6%; net profit of net income of 109 million yuan, a year-on-year decrease of 181.56%; net profit of non-retracted net profit of 115 million yuan, a year-on-year decrease of 108.55%.

reviews

The decline in short-term performance was affected by multiple factors, but fee control was effective. We believe that the pressure on the company's 23Q3 performance was affected by multiple reasons:

1) Revenue declined, but was also affected by the high 22Q3 revenue base: the company's 22Q3 revenue increased 20.23% year on year, which was affected by the high base.

2) The decline in gross margin may be related to changes in the company's revenue structure: according to information disclosed in the company's semi-annual report, “Judging from the order structure, the share of service contract amounts has increased compared to the same period last year and the whole of last year.” Considering that the company's security service margin is lower than the gross profit margin of safety products, we speculate that the company's 23Q3 gross margin decline or is affected by changes in the company's revenue structure. In the long run, security services are expected to increase customer stickiness and help the company explore potential customer needs in a forward-looking manner, which is expected to bring more benefits to the company.

3) Financial expenses for the single quarter of 23Q3 increased by about 13 million yuan compared to 22Q3: on the one hand, it was affected by the company's new bank loans. According to the company's third quarterly report, the company added 235 million yuan in short-term loans as of 2023/9/30 compared to the same period last year; on the other hand, due to bank interest rate cuts on deposit interest rates, the company's interest income decreased.

However, the company's overall cost control has begun to bear fruit. The company's 23Q3 R&D, sales, and management expenses changed by +2.99%, -0.47%, and -26.26%, respectively, and the sum of the three fees decreased by 2.36% year-on-year.

We believe that the company's short-term performance is under pressure from external environmental influences such as weak macroeconomic recovery, a high historical quarterly revenue base, and revenue structure adjustments. However, on the basis of the company's current cost control efforts, a recovery in revenue-side growth is expected to bring about a rapid recovery in profits.

The “Fengyunwei” security model empowers practical safety operations

The Fengyunwei model is a large-scale vertical model for the security industry that integrates the company's deep cybersecurity cultivation for more than 20 years and more than 10 years of AI security research and practice. It is a set of cybersecurity operation support decision-making systems covering multiple scenarios based on massive security expertise training. It mainly solves three major problems: actual situation command and dispatch, red and blue confrontation auxiliary decision-making, and improvement of security operation efficiency. We believe that the company's products in the large model field are expected to achieve significant improvements in safety efficiency in practical safety operation scenarios, leverage the incremental demand of downstream customers, and bring about long-term revenue growth and product strength improvements.

Profit forecasting and valuation

Considering that the company's overall revenue did not achieve positive growth in the first three quarters, but the company's revenue decline in the third quarter narrowed, and fee control measures had already paid off, we forecast that the company's 2023-2025 operating income was 26.86 billion yuan, 30.35 billion yuan, and 3,529 million yuan, respectively, and net profit was 1.88, 3.25, and 436 million yuan respectively. Referring to the closing price on November 1, 2023, the corresponding PE for 2023-2025 is 39, 23, and 17 times, respectively, maintaining the “buy” rating.

Risk warning: Budget recovery for downstream customers fell short of expectations; gross margin continued to fluctuate due to changes in revenue structure, new product development and implementation fell short of expectations, and industry competition intensified.