In the third quarter of 2023, the company's fee control effect was effective, business quality was optimized, and performance maintained a recovery trend, which is basically in line with our expectations. We continue to be optimistic about the company's long-term work and leading competitive position in the fields of automotive intelligence, medical informatization, etc., and expect the company's automotive business to benefit from the recovery in downstream prosperity and the big model strategy to drive overall business transformation and upgrading to drive performance growth. We maintain the company's 2023-2025 EPS forecast at 0.24/0.38/0.50 yuan. Taking into account comparable company valuations and innovative joint ventures that further financing is expected to bring investment income, we gave the company 36 times PE in 2024, corresponding to the target price of 14 yuan, maintaining the “increased holdings” rating.

Matters: In the first three quarters of 2023, the company achieved revenue of 6.263 billion yuan, +12.6% year-on-year; net profit of 135 million yuan, +4.7% year-on-year; net profit after deduction of 42 million yuan, +323.6% year-on-year. Looking at a single quarter, the company achieved revenue of 2,373 billion yuan in the third quarter, +8.8%; net profit of 40 million yuan, -13.1%; net profit after deducting non-return net profit of 15 million yuan, +804.8%; gross margin/net profit margin for the third quarter was 27.68%/1.59%, respectively, -0.09/-0.49pct, and sales/management/R&D/financial expenses of 5.15%/6.89%/9.79%/1.04%, respectively, -0.35/-0.68/-1.29/+ 1.83pcts

Management analysis: The cost control effect is remarkable, and the quality of operations has improved. In the third quarter of 2023, the company continued its cost control measures, and the total sales/management/R&D rate decreased by 2.32 pcts year-on-year. Although the slow recovery in downstream demand affected net interest rates, net profit after deducting non-return to parent increased year-on-year, and the quality of operations improved steadily. By business, in terms of smart car business, Neusoft Group and Neusoft Ruichi were respectively shortlisted in the top 10 suppliers in four major fields, including cockpit domain controllers, intelligent cockpit software as a system, in-vehicle 5G/V2X modules and systems, and intelligent vehicle middleware selected by Hi-Tech. In terms of medical and social security business, according to IDC data, Neusoft ranked first among medical imaging information system manufacturers in 2022; during the reporting period, Neusoft Xikang, which invested in the fields of health management and Internet medical care, entered Hong Kong stocks on September 28 and became “Internet+ Healthcare” “First share”.

Business outlook: mass production for automotive customers continues to advance, and large-scale model strategies drive business upgrading. In the automotive business, the company's smart car products continue to be launched. Neusoft provides intelligent cockpit domain control, 5G Box, and automotive software development services based on the Qualcomm 8295 cockpit chip for Jieyue 01, which was jointly built by Baidu and Geely. According to the official WeChat account, Jieyue 01 has already received more than 15,000 orders 24 hours after it began booking. In terms of innovative business, the technical layout of large models has been continuously improved to promote the transformation and upgrading of the entire business. In August 2023, the company established the “Neusoft Magic Technology Research Institute”, which aims to continuously explore the innovation and application of artificial intelligence technology. It will launch and implement Neusoft's “Big Language Model System Engineering” strategy to create a general development platform for Neusoft LLM-SE, targeting all business fields such as healthcare, human resources, finance, media, human resources and smart cars, and complete implementation of typical scenarios and large-scale promotion, providing comprehensive support for Neusoft's AI model-driven business transformation. Previously, Neusoft had launched a variety of AI+ medical industry applications for the medical field, including Tianyi Medical Field Big Model, Flying Biao Medical Imaging Labeling Platform 4.0, and Web-based virtual endoscopes.

In the information technology business, the company's government software business is ahead in competitiveness, benefiting from the growth of the health insurance data element market.

In September 2023, CCID Consultants released the “2023 China Digital Government Application Development Research Report”. Neusoft's “Digital Government Software and Application Services” market competitiveness continues to lead the country, and continues to rank first in the leadership quadrant for three years in the fields of human society and health insurance. In the field of medical insurance, Neusoft has a first-mover advantage and has participated deeply in the construction of health insurance platforms in 25 provinces, and is expected to continue to benefit the health insurance data factor market.

Risk factors: the risk of increased market competition; the risk that the implementation of large models falls short of expectations; the risk that the development or acceptance progress of informatization projects falls short of expectations; the risk that the equity value of foreign investment will fluctuate greatly; the financing progress of joint venture companies will fall short of expected risk; the progress of business development in the medical industry will fall short of expected risk; the risk of large exchange rate fluctuations.

Investment advice: We continue to be optimistic about the company's long-term work and leading competitive position in the fields of automotive intelligence, medical informatization, etc., and expect the company's automobile business to benefit from the recovery in downstream prosperity and the continued implementation of ongoing medical business projects to drive the company's performance growth. We maintain the company's 2023-2025 EPS forecast at 0.24/0.38/0.50 yuan. Referring to the consensus valuation of automotive intelligence comparable company Wind, Desai Seaway (2024E 33x PE), Zhongke Chuangda (2024E 33x PE), and comparable medical informatization companies Weining Health (2024E 30x PE), and Jiuyuan Yinhai (2024E 32xPE) valuations. Considering that the company's innovative joint ventures are expected to further finance and bring investment returns, we gave the company compared to the industry The average valuation level has a certain premium, that is, 36 times PE in 2024, corresponding to the target market value of about 16.8 billion yuan, equivalent to the target price of 14 yuan, maintaining the “increased holdings” rating.