Incident Overview
On April 25, Sanwei Xinan released its 2023 quarterly report. The company achieved operating income of 36.21,62 million yuan in the first quarter of 2023, an increase of 32.71% over the previous year; net profit to mother was -3.7834 million yuan; net profit after deducting non-return to mother was -4.7792 million yuan.
Performance slightly exceeded expectations, and revenue growth remained high
On the revenue side, the company's revenue has maintained high growth. We think it is mainly due to: 1) the gradual recovery of the epidemic, some orders delayed until this year achieved revenue recognition in the first quarter, and 2) the secret reform+confidential evaluation policy progressed smoothly, and downstream customers increased their investment in information security, leading to product procurement needs. On the cost side, the company's gross margin in 2023Q1 was 68.94%, which we believe was mainly due to fluctuations in the revenue structure; looking ahead to the whole year, we are still optimistic about the optimization effect of the company's revenue structure optimization and cost reduction on self-developed chips on gross margin. On the profit side, the company's net profit loss in 2023Q1 narrowed sharply, mainly due to: 1) rapid revenue growth and 2) interest income from fund-raising project funds of about 6.61 million yuan. After deducting interest income, the absolute value of the company's net profit to mother was basically the same as in the same period last year.
Confidential regulations have been implemented, and the scope and enforcement of confidential reviews have been further strengthened. On April 14, the National Standing Committee reviewed and approved the “Commercial Password Management Regulations (Revision Draft)”. After the “Regulations” (Draft for Comments) came into effect, 1) Enforcement was strengthened: the national standard of equal protection 2.0 will change from “recommended” to “mandatory”, and further clarified that confidential reviews are a precondition for equal protection. 2) Expansion of the scope of confidential reviews: Networks and information systems such as non-confidential critical information infrastructure, networks with level 3 or higher protection, and national government information systems are all required to conduct confidential reviews, and the scope of confidential reviews has been further expanded. Driven by policies, the secret review is expected to achieve double expansion in terms of speed of progress and breadth of implementation. According to estimates in our previous report, Secret Review+Secret Reform Compliance will bring a market size of at least 30 billion dollars, and the industry will grow from the previous few billion dollars to 10 billion dollars of market space. In the long run, as the foundation for AI, data elements, and data security, commercial secrets are widely used in a wide range of fields and space.
The system business expanded smoothly, and self-developed chips achieved revenue
In 2022, the company's revenue of password boards, password machines, and cryptographic systems was 0.46/1.28/143 million yuan respectively, up -40.22%/7.85%/143.69% year-on-year. Among them, 1) Cryptographic Systems revenue is growing rapidly, mainly due to the expansion of the company's system products in the securities and other fields, and the overall progress of the company's downward expansion of the system business is progressing smoothly. 2) In terms of self-developed chips, the company's first self-developed cryptographic security chip, XS100, was successfully mass-produced in mid-2022, and achieved revenue of about 6.41 million in the IoT field in that year, which is expected to continue to expand along with downstream IoT terminals. Furthermore, the company's self-developed chips have gradually been installed in self-developed cryptographic boards and machines, and it is expected that product costs will continue to be optimized and competitive advantages will be consolidated.
Investment advice
The company has strong R&D capabilities, starting in the board/machine field with high barriers in the commercial secret industry, bringing cost and performance advantages to self-developed chips and expanding the system downward to open up room for growth. We believe that the company can enjoy the dividends brought by the accelerated development of the industry in the short, medium and long term. Furthermore, the company's high-performance self-developed chips have opened up the IoT market and built a second growth curve, and performance is expected to grow rapidly. We expect the company's revenue from 2023 to 2025 to be 482/676 million yuan, and net profit to mother will be 1.67/2.22/276 million yuan, respectively. Maintaining the buy-A investment rating, the target price for 6 months is 144.50 yuan, which is equivalent to 50 times the dynamic price-earnings ratio of 2024.
Risk warning: Policy implementation falls short of expectations, industry competition intensifies, and cryptographic chip implementation falls short of expectations.