Incident: The company released its 2023 annual report, achieving operating income of 798 million yuan, +18.9%; net profit of 0.42 million yuan, +48.37% year over year; net profit after deducting non-return to mother of 0.27 million yuan, +429.44% year over year; gross profit margin of 34.89%, +2.93pct year over year; sales expenses/management expenses/R&D expenses were 0.97/0.58/ 101 million yuan respectively, accounting for 12.19%/7.27%/12.63% of revenue.

Comment: The smart power business is the company's basic market. The company's electricity sector achieved operating revenue of 730 million yuan in 2023. The company's main business covers smart electricity, smart water conservancy and smart rail transit. Smart power is the company's main business. In 2023, the smart power business revenue accounted for more than 91% of total revenue, and the company has achieved a market share of about 50% in the transmission inspection industry. Furthermore, the company signed a cooperation agreement with Huawei and officially joined the Shengteng Wanli Partner Program. The two sides will carry out all-round cooperation in various fields such as electricity, water conservancy, rail transit, etc., to jointly prosper the Shengteng AI ecosystem.

The prosperity of the water conservancy information technology industry continues to improve, and the company's second growth curve is growing strongly. The company's revenue in the water conservancy business increased 960% year over year in 2023. In 2023, the total investment in water conservancy construction was 119.6 billion yuan, +10.1% year-on-year. Using past experience, the company developed a digital twin smart water conservancy four-pre system product system with “four pre-forecast” functions with forecasting, early warning, preview, and planning functions to achieve deep integration of next-generation information technology such as artificial intelligence, digital twins, and drones with water conservancy services. The Mengshan Reservoir project in which the company participated was recognized as a standardized management project by the Ministry of Water Resources, and the digital twin platform for urban flood control river and lake management in Binzhou, Shandong received a briefing from the Ministry of Water Resources for key promotion; the Ministry of Industry and Information Technology announced the “2023 Advanced Computing Typical Application Case List”, and the “Smart Water Resources Digital Twin System Based on Artificial Intelligence” developed by the company was selected for the urban brain field list.

The company's railway intelligent safety business is expected to become a key investment direction for railways, creating the third largest growth pole.

In 2023, the national railway completed fixed asset investment of 764.5 billion yuan, an increase of 7.5% over the previous year. In 2022, the company participated in the Guinan High Speed Rail's “Intelligent Security System Based on Multi-dimensional and AI Visualization” project. Overall, it passed the project review and had a first-mover advantage in the market. In 2023, the company participated in China Railway Group's “Line Safety and Environmental Control Platform” project. It was at the leading level in many evaluation tests, and the implementation of artificial intelligence technology in the railway industry was gradually promoted.

Profit forecast: The company uses the smart grid business as the basic market to create a new growth pole for smart water conservancy and smart rail transit. Considering the company's share payment fees, we lowered the company's net profit forecast for 2024 to 2026 to 1.05, 1.45, and 186 million yuan, maintaining the “buy” rating.

Risk warning: Industry development, company business progress, profit forecasts and valuations fall short of expectations.