Matters:
The company achieved operating income of 236 million yuan in the first three quarters of 2023, an increase of 37.35% over the previous year; net profit of 39.6981 million yuan, an increase of 33.24% over the previous year; and net profit of 32.3854 million yuan after deducting non-net profit, an increase of 35.54% over the previous year.
Commentary:
Industry policies are being actively promoted, and the results are driving rapid growth in performance. In the third quarter of 2023, the company achieved operating income of 133 million yuan, an increase of 70.30% over the previous year, net profit of 29.5588 million yuan, an increase of 90.88% over the previous year, and net profit of 23.8046 million yuan, an increase of 54.97% over the previous year. The increase in performance is mainly due to 1) active promotion of commercial cryptographic industry policies; 2) reduction in product costs due to self-developed cryptographic chips; 3) increased market development efforts; and 4) increasing the scope of mergers and acquisitions in Jiangnan.
Q3 Gross margin increased significantly month-on-month, and investment in R&D and sales continued to increase. In the third quarter of 2023, the company's gross margin was 73.95%, an increase of 1.98 pct over 2023Q2, achieving a significant increase over the previous month. On the cost side, the company's R&D expense ratio, sales expense ratio, and management expense ratio were 29.53%, 26.13%, and 10.95% respectively in the first three quarters of 2023, compared to +1.68pct, +2.39pct, and -0.85pct. Among them, the increase in R&D expenses rate and sales expense ratio was mainly due to increased R&D investment and increased market development efforts.
Innovative breakthroughs in the field of intelligent connected vehicles help the safe development of the industry. In September 2023, the company showcased a new generation of self-developed cryptographic chips and vehicle network security solutions at the China International Intelligent Industry Expo, and held a special press conference on “Digital Density Integration · Core Protection for the Future” to showcase innovative breakthroughs in the field of intelligent connected vehicles and promote the development of intelligent connected vehicle security with advanced cryptographic technology.
Publish targeted incentives to strengthen financial layout. The company announced an equity incentive plan at the end of September 2023. The incentive targets 28 people, all of whom are core employees of Jiangnan Keyou; the number of restricted shares to be granted is 993,000 shares, accounting for about 0.87% of the company's total share capital; the grant price is 34.10 yuan per share. Among them, Jiangnan Keyou will need to meet the assessment goals in 2023: based on 2022 operating income, the revenue growth rate in 2023 should not be less than 20%; or, based on 2022 net profit, the net profit growth rate in 2023 should not be less than 20%, respectively.
Investment advice: Merge the Jiangnan Keyou report and raise the profit forecast. We expect the company's operating income for 2023-2025 to be 515/719/959 million yuan (the original forecast value for 23-25 was 4.58/611/797 million yuan), and net profit of 1.69/2.37/319 million yuan (the original forecast value for 23-25 was 1.41/1.85/239 million yuan). In terms of valuation, refer to the valuation level of comparable companies and consider that the company is a leading enterprise in the field of commercial cryptography. The business is in a period of rapid development. The company was given 44xPE in 2023, with a corresponding target price of about 65 yuan, maintaining a “recommended” rating.
Risk warning: the risk of cryptographic chips falling short of expectations; increased industry competition; product development falling short of expectations.