Incident: Hang Seng Electronics released its 2023 annual report, achieving full year operating income of 7.281 billion yuan (+11.98%); net profit to mother of 1,424 billion yuan (+30.50%); net profit after deducting non-return to mother of 1,448 billion yuan (+26.51%). According to Q4 alone, the company's revenue was 2.91 billion yuan (+5%), net profit attributable to mother was 8.2 billion yuan (-24%), after deducting non-net profit of 910 million yuan (+12%).

The company has focused on the core product line for 23 years, with steady revenue growth and improved human efficiency. The company further focused its resources on the core product line and gradually set up subsidiaries to operate independently for businesses with a high degree of project-based engineering. The gross profit margin of the main business in '23 was 74.85%, up 1.3 pct from the previous year. Annual expenses increased 8.8% year over year, and the growth rate decreased by about 5 pcts compared to 2022. The overall cost rate was 57.55%, down 1.65pct from 2022. At the personnel level, the total number of employees at the end of 2023 was 13,189, a decrease of 158 compared to the end of '22. Annual per capita income was about 550,000, a significant increase from 490,000 in '22.

By business sector: The growth rate of the Fortune Technology service sector, which accounts for about 23.8% of revenue, is slowing down, and the asset management technology service sector, which accounts for about 23.5% of revenue, is growing steadily. Other sectors are growing faster. In particular, the SAAS business and data services of Hang Seng Juyuan have achieved faster growth. The revenue of the Fortune Technology Services segment increased by 4.27%, and the growth rate slowed, mainly due to the slowdown in market demand for existing products, the lack of full release of demand for credit and innovation products, and increased competition. The revenue of the asset management technology service sector increased by 9.27%, and the growth rate was steady. O45 completed full-stack Xinchuang R&D. Among them, the completion of key projects such as Huabao Fund's O45 project prepared for full batch delivery. Revenue from the Operations and Institutional Technology Services segment increased by 14.32%. Major products such as next-generation TA, Internet TA, and next-generation valuation systems are progressing well at the level of signing and launching. The revenue of the Risk and Platform Technology Services segment increased by 19.06%. Among them, the release of LightGPT related application products and the release of all Shintech versions of the main product were completed. Revenue in the data services business segment increased by 19.27%. Among them, the number of active WarrenQ users continued to grow, and large model application products were co-built with many customers.

In the short term, Xinchuang's acceleration in the capital market is expected to provide positive conditions for financial institutions to increase investment in technology. In the long run, the investor-centered policy orientation of the capital market is expected to bring opportunities to wealth management business and asset management business. All of the company's main products have been adapted to Xinchuang. In particular, the maturity of the main products represented by UF3.0 and O45 has improved, and they have been launched in Shinchuang's benchmark customers, and can be launched in batches later. The company's new investment management system products, such as Fusion China, have successfully signed contracts with a number of industry benchmark customers, completed projects for leading bank financial management clients, and are beginning to be competitive in the asset management industry.

Profit forecast and valuation: The company's 2024-2026 revenue is expected to be 80.0/88.4/9.78 billion yuan, net profit to mother is 17.7/20.1/23 billion yuan, and the current stock price corresponds to PE of 26/23/20x. In the context of the current macroeconomic environment, we are optimistic about the company's business development resilience as an industry leader to maintain steady growth. At the same time, considering the exercise price of 39.44 yuan/share in the equity option incentive plan issued by the company in August 23, the current stock price is cost-effective and maintains a “buy” rating.

Risk warning: Competition in the industry is intensifying; the promotion cycle of new products is long; the pace of promotion of Xinchuang falls short of expectations.