Introduction to this report:

The company's performance turned losses into profits, and the “dual engine” business layout of Xinchuang and General Security achieved remarkable results. With the rapid expansion of the general security business in various scenarios such as video surveillance, future revenue growth may exceed expectations.

Key points of investment:

Maintain an increase in holdings rating and maintain the target price of $20.55. According to the company's performance forecast, the net profit range of 33 to 43 million yuan was achieved in 2023, and the net profit range after deduction was -12 to -2 million yuan. Maintain the company's 2023-2025 EPS forecast at 0.21/0.44/0.65 yuan, respectively, and maintain the target price of 20.55 yuan.

Focusing on the general safety business, the performance exceeded expectations. As a leader in the PKI field, the company further focused on the general security business and optimized the revenue structure. The gross margin of its main business increased significantly in 2023 compared to 2022, and the “dual engine” business layout of Xinchuang and General Security achieved remarkable results. At the same time, the company is based on the concept of cost reduction and efficiency and lean management, and management expenses have been steadily declining. According to the performance forecast, the company achieved a net profit range of 33 to 43 million yuan in 2023, and the performance exceeded expectations.

PKI secret reviews have boosted industry prosperity, and application effects in scenarios such as the Internet of Vehicles have been remarkable. The cryptographic industry has formed a top-level plan of “one law, three rules and one rule”. The country has formed high compliance requirements and implementation rules for replacing national secrets. The transformation of national secrets in the government, medical, financial and public security industries has entered a period of high growth, and the company will benefit significantly as a provider of cryptographic chips, PKI and other products.

The video security business is growing rapidly, and the potential market space is huge in the future. The national standard “Public Safety Video Surveillance Network Information Security Test Specification” was released. The standard will be officially implemented on October 1, 2024. We believe that the Ministry of Public Security's First Research Institute, Ger Software, etc. as drafting units have a first-mover advantage in video security testing and are expected to quickly seize the market. Considering that camera security is also a high-value part of video surveillance security, future revenue growth may exceed expectations as the company's camera security products accelerate penetration.

Risk warning: Business development falls short of expectations, and customer budget expenses are insufficient.