Incident: On October 27, Tianrongxin released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved revenue of 1,648 billion yuan, an increase of 12.63% year on year; net profit of 248 million yuan, loss decreased by 40.85% year on year; net profit after deducting non-net profit - 264 million yuan, loss decreased by 42.38% year on year. In the third quarter alone, the company achieved revenue of 644 million yuan, a year-on-year increase of 10.32%; net profit of 36 million yuan, a year-on-year decrease of 83.09% in losses; and net profit of 41 million yuan, a year-on-year decrease of 81.16% in losses.

Gross margin increased markedly, and profitability recovered at an accelerated pace. In the first three quarters of 2023, the company achieved gross margin of 62.31 percent, year-on-year +1.08 pct; the gross profit margin for the third quarter alone was 73.03%, +20.77 pct year-on-year. The main reasons for the improvement in gross margin were: 1) the Q3 high-margin business accounted for a relatively high margin; 2) the increase in gross margin of the main business sector: the gross profit margin of the basic security service business (first three quarters) was +35.03pct year-on-year, mainly due to improved efficiency and cost control; the gross profit margin of cloud computing and cloud security products and services (first three quarters) was +2.38pct year-on-year, mainly due to the rapid growth rate of software revenue in the cloud computing business, with a year-on-year growth rate of more than 50%. Net profit for the first three quarters was reduced by 40.85% year on year, and loss was reduced by 83.09% year on year in the third quarter alone. Profitability recovered at an accelerated pace.

Three fees are effectively controlled, pre-investment in new directions, and layout are basically completed. 1) In the first three quarters of 2023, the year-on-year growth rate of the company's sales expenses slowed, with a sales expense ratio of 39.03%, year-on-year -0.95 pct, mainly due to the company's deep cultivation in the industry, market decline, and effective implementation of the channel expansion strategy, and remarkable results in improving the company's quality and efficiency, with a significant increase in per capita income; 2) the management cost rate was 12.98%, -3.22 pct; 3) the R&D cost rate was 35.51%, year-on-year -7.00 pct. The company has completed pre-investment and comprehensive layout in cloud computing, cloud security, innovation security, data security, industrial Internet security, and vehicle network security, etc., and R&D expenses have been reduced year-on-year.

AI empowers products and helps improve quality and efficiency. The company's Tianwen Big Model integrates AI technology with the product line. It is mainly used in three aspects: 1) Safety knowledge generation: the company generates safety knowledge based on machine learning technology, and the big model has improved the accuracy of safety knowledge and output efficiency; 2) Service support: An intelligent Q&A system based on the Tianwen Big Model provides automated questions and answers on knowledge in the field of network security to improve the work efficiency and service quality of support staff; 3) Strengthen security analysis: strengthen the company's analysis and management product engine to enhance the analytical capabilities of situation awareness products, or make it easier for customers to use based on the Tianwei Big Model Protection recommendations.

Investment suggestions: We estimate that the company's revenue for 2023-2025 will be 45.66/57.82/7.341 billion yuan; net profit will be 4.55/6.55/834 million yuan respectively; corresponding to 2023-2025 EPS of 0.38/0.55/0.70 yuan, respectively. Maintain a “buy” rating.

Risk warning: The risk that competition in the industry will intensify, downstream demand will fall short of expectations, and iterative technology updates will fall short of expectations.