Investment events: The company released the three-quarter report for 2023: operating income for the first three quarters of 2023 was 1,648 million yuan, up 12.63% year on year; net profit of the mother - 248 million yuan, loss narrowed by 40.85% year on year; net profit after deducting non-return net profit - 264 million yuan, loss narrowed by 42.38% year on year. In 2023, revenue for Q3 alone was 644 million yuan, up 10.32% year on year; net profit from net income was 36 million yuan, a year-on-year decrease of 83.09%; net profit after deducting non-return net profit was 41 million yuan, a year-on-year narrowing of 81 million yuan.

16%

The company's revenue continues to grow steadily, and the growth rate of cloud computing and cloud security is obvious. The company's revenue for the first three quarters of 2023 was 1,648 million yuan, up 12.63% year on year, while Q3's revenue alone was 644 million yuan, up 10.32% year on year. Looking at the breakdown, in the single Q3 of 2023, revenue from basic security products was 381 million yuan, up 13.49% year on year; revenue from big data and situation sensing products and services was 58 million yuan, down 19.58% year on year; basic security service revenue was 143 million yuan, up 7.65% year on year; and revenue from cloud computing and cloud security products and services was 59 million yuan, up 42.22% year on year. Looking at the revenue breakdown for the first three quarters, revenue from basic security products was 1,045 million yuan, up 13.36% year on year; revenue from big data and situation sensing products and services was 130 million yuan, up 0.09% year on year; basic security service revenue was 298 million yuan, up 12.73% year on year; and revenue from cloud computing and cloud security products and services was 169 million yuan, up 16.93% year on year. Looking at the customer structure, in the first three quarters, government customer revenue increased 32.62% year on year. Among the industry segments, local government industry revenue increased by 43.90%, operator industry revenue increased 24.72%, and education industry revenue increased 16.04%.

The fee control effect was obvious, and the gross margin increased markedly in the third quarter alone. The company's gross margin for the first three quarters of 2023 was 62.31%, an increase of 1.09pcts compared with the same period in 2022. The share of the company's high-margin business increased in the third quarter. The gross margin for Q3 alone was 73.03%. On the basis of the growth in the second quarter, it continued to grow 8.51 pcts month-on-month, up 20.77 pcts year-on-year from last year. The company's personnel structure continues to be optimized, and the effect of improving quality and efficiency is remarkable. Revenue per capita has increased markedly. Expenses for the first three quarters were basically the same year on year, and the cost rate for the period fell 11.17 percentage points year on year. The R&D side company has completed pre-investment and comprehensive layout in cloud computing, cloud security, innovation security, data security, industrial Internet security, and vehicle network security. The R&D cost rate for the first three quarters fell by 7 pcts year on year; the marketing-side company's deep industry cultivation, market decline, and channel expansion strategies were effectively implemented, and the sales expenses rate for the first three quarters fell 0.95pcts year on year. The company's accounts receivable recovery and sales repayment conditions improved year over year.

The company's three main businesses are working together to achieve a high growth rate in innovation revenue. According to the latest data from IDC, by 2027, China's cybersecurity spending is expected to be close to US$30.88 billion, with a five-year compound growth rate of 20.1%, ranking first in the world; China's cybersecurity market continues to lead the world in growth, with a five-year CAGR far ahead, and broad market prospects. In the cybersecurity market, investment in manufacturing and professional services is also growing rapidly, with a five-year compound growth rate exceeding the industry average. Driven by factors such as the digital economy, national security, and personal privacy protection, all walks of life still need to match corresponding cybersecurity protection measures to make the “pace” of digitalization faster and more stable. In recent years, the company's market decline and the effective implementation of channel expansion strategies have continued to contribute to the output of the local government industry. The company has a strong network security business, data security continues to gain strength, and the endogenous security capabilities of cloud computing are further advanced. The company's credit and innovation business revenue increased by 185.73% year-on-year in the first three quarters of this year, mainly due to the continued implementation of credit and innovation substitution on the government side, such as the credit and innovation substitution of local governments. Previously, it mainly covered provincial capitals and large cities. Currently, it has gradually reached full coverage of small cities and even counties. At the same time, the credit and innovation substitution of state-owned enterprises has begun and gradually advanced.

Investment suggestions: We expect the company's 2023/2024/2025 revenue to be 46.06, 58.83, and 7.205 billion yuan, up 30%, 28%, 22% year on year; the company's net profit of 4.23, 5.96, and 797 million yuan; the company's 2023/2024/2025 EPS is 0.36/0.50/0.67 yuan respectively, corresponding to PE 31.0/22.0/16.4 times, giving it a “buy” rating.

Risk warning: New market development risks, company business progress falls short of expectations, market competition intensifies