Matters:

The company announced its 2023 annual report. In 2023, it achieved operating income of 5.204 billion yuan, an increase of 21.45% over the previous year, and realized net profit of 326 million yuan to mother, an increase of 28.76% over the previous year. The 2023 profit distribution plan is: It is proposed to distribute 2.0 yuan in cash (tax included) for every 10 shares.

Ping An's point of view:

Revenue growth has increased marginally, and system integration services have increased. Revenue of 5.204 billion yuan was achieved in 2023, up 21% year on year (vs 16% in the first three quarters), and the growth rate increased marginally. In 2023, the company achieved revenue of 3.322 billion yuan, an increase of 6% over the previous year, accounting for 64% of total revenue. Among them, major banks and joint stock banks in China contributed 51% of software revenue, small and medium-sized banks and agricultural credit cooperatives contributed 34% of software revenue, and non-banks and other financial customers accounted for 15% of software revenue. 2) In 2023, the company achieved revenue of 1,720 billion yuan in integrated system sales and services, an increase of 77% over the previous year. The rapid growth was mainly driven by the increase in demand for banks' IT Xinchuang. 3) In 2023, the company's innovative operation business achieved revenue of 157 million yuan, a year-on-year decrease of 5%. On the profit side, the company achieved net profit of 326 million yuan in 2023, a year-on-year increase of 29% (vs. 42% in the first three quarters), while net profit to mother after deducting non-recurring profit and loss and excluding share payment expenses was 362 million yuan, an increase of 65% over the previous year.

The expense ratio declined year-on-year during the period, and the net interest rate was relatively stable. The company's gross margin fell 1.07 percentage points year-on-year to 25.94% in 2023, mainly due to an increase in the share of system integration businesses with low gross margin in the revenue structure, which rose from 23% to 33% in 2022. Specifically, the gross margins of software development and service, system integration sales and service, and innovative operations changed year-on-year by +1.71 pct, +1.40 pct, and -1.59 pct to 31.13%, 10.48%, and 84.13%, respectively. The company's R&D investment rate decreased by 1.01 percentage points year on year to 19.47% during 2023. At the same time, the company's R&D investment continued to grow. In 2023, the R&D investment amount (full cost of the company's R&D investment) was 568 million yuan, an increase of 14% over the previous year, and the R&D expenditure rate was 10.92%. Against the backdrop of a year-on-year decline in the expense ratio, the company's net interest rate in 2023 increased 0.36 percentage points year-on-year to 6.26%.

The financial credit business is gradually improving, and strategic cooperation continues to advance. On the one hand, the company is still actively expanding the banking IT market. New software orders for the software development business in 2023 increased by 5% compared to the same period last year. In terms of data business lines, more than half of the new orders in 2023 are businesses related to Xinchuang. The company has important orders with Huawei, Tencent, Starlink, and NTU GM in the field of domestic big data platforms. The credit business line has added a number of credit intermediary projects exceeding 10 million, and has gained an absolute advantage in segments such as asset preservation, post-loan management, and bad collection, with a bid winning rate of over 80%. In terms of supervisory product systems, the company ranked first in the field of regulatory compliance, IDC and CCD. It continued to expand a policy bank supervision project, a joint stock bank's one-meter-pass project, and a unified supervision project for large urban commercial banks, and successfully launched a joint stock bank supervision platform upgrade project. On the other hand, the company continues to break through in innovative fields such as operational business and generative AI cooperation. In terms of innovative operation business, the company added platform cooperation with a bank and seven non-bank institutions; reached in-depth cooperation with a commercial bank in a certain city in auto finance business operations; Financial Cloud signed a new central financial enterprise, two joint stock banks and a guarantee company; and signed a strategic cooperation agreement with Xiamen Asset Management to establish a strategic partnership in the field of personal loan non-performing asset business. In terms of generative AI, the company officially signed a big model cooperation agreement with the domestic big model company Zhi Spectrum AI in 2023.

Profit forecast and investment advice: According to the company's 2023 annual report, we adjusted the company's profit forecast. The company's net profit for 2024-2026 is estimated to be 381 million yuan (previous value: 497 million yuan), 446 million yuan (previous value: 596 million yuan), and 528 million yuan (new), respectively. The corresponding EPS is 0.54 yuan, 0.63 yuan, and 0.75 yuan, respectively. The PE corresponding to the closing price on March 29 is 24.6 times, 21.0 times, and 17.7 times, respectively. The company has been deeply involved in banking IT for more than 20 years. It is a banking software and service provider with a complete domestic product line, and the growth path is clear. Currently, the company's financial credit innovation business is gradually improving, strategic cooperation continues to advance, and the company is forwardly laying out strategic opportunities for generative AI. We continue to be optimistic that the company will maintain its leading position in the financial IT industry and maintain its “recommended” rating.

Risk warning: 1) Risk of increased competition in the industry: The company is already in the first tier of the industry, but if leading manufacturers in other segments of the industry accelerate horizontal expansion or increase the number of new entrants, it will lead to increased competition in the industry, and the company's penetration rate may fall short of expectations. 2) Risk of innovative operations or overseas business progress being blocked: The company positions innovative operations and overseas business as important future development directions, and is investing more in the Southeast Asian market layout and establishing branches. If external factors such as slowing down the progress of innovative operations and intensifying competition in the Southeast Asian market suddenly occur, the company's performance growth will fall short of expectations. 3) Risk that banks' IT investment falls short of expectations: The company's main customers are financial institutions mainly in the banking industry. If IT investment in the downstream banking industry falls short of expectations, the company's operations will also be affected.