Incidents:
The company released its 2023 annual report, and achieved operating income of 7.662 billion yuan for the full year of 2023, up 3.36% year on year; net profit to mother was 198 million yuan, up 1.89% year on year, and net profit not returned to mother was 110 million yuan, an increase of 9.97% year on year.
In Q4 alone, 2023Q4 achieved revenue of 2,854 billion yuan, up 7.08% year on year; net profit to mother was 743 million yuan, down 16.55% year on year, and net profit after deducting net profit of 712 million yuan, down 20.93% year on year.
Comment:
Revenue structure: The security business showed positive growth in the second half of the year, the cloud computing business supported growth, the resilience of corporate customer demand was prominent, and the overseas market continued to grow rapidly
By business, in 2023, the company's security, cloud computing, basic network and IoT businesses achieved revenue of 38.92, 30.9, and 680 million yuan respectively, with a slight decrease of 0.14% year-on-year, an increase of 8.07%, and a year-on-year increase of 3.7%, respectively.
Among them:
The security business 23H2 achieved a year-on-year increase of 0.17%, which is a certain improvement over the decline in revenue in the first half of the year;
The cloud computing business has played a good supporting role in the company's business growth, and revenue from hyperconverged HCI products has maintained a relatively steady growth.
Looking at downstream customers, the company achieved revenue of 3.425, 34.29, and 809 million yuan in 2023, respectively, with year-on-year growth of 19.73%, 5.4% year-on-year, and 12.86% year-on-year decline, respectively. Among them, enterprise customers have shown good resilience in their demand for IT construction, and customers in industries including energy and transportation have maintained a high order growth rate.
Looking at the market area, the company achieved revenue of 346 million yuan in the overseas market in 2023, an increase of 47.98% over the previous year, continuing the high growth trend. Overseas business revenue accounted for 4.52% of overall revenue, an increase of 1.37 pct compared to 2022.
Gross profit margin: The gross margin of the cloud computing business rebounded better than expected. The gross margin of the 23H2 security business was 65.13% in 2023, up 1.31pct compared to 2022. Among them, the gross margins of the security, cloud computing, basic network and IoT businesses were 81.24%, 47.47%, and 53.24%, respectively, up 0.74, 3.91, and 0.19pct year-on-year respectively. The main reason was that the company improved its supply chain management level and that of upstream manufacturers Bargaining power.
The company's 23H2 security business gross profit margin of 82.38% has also achieved a significant increase. It is basically close to the 2019 security business gross margin level (the company's security business gross profit margin was 82.55% in 2019, and 81.67%, 80.84%, and 80.5% in 2020-2022, respectively).
Cash Flow: Continued to Exceed Expectations
The company's net cash flow from operating activities in 2023 was 947 million yuan, an increase of 26.97% over the previous year. Continuing the trend of improving cash flow in the first three quarters, it showed an inflection point ahead of the profit side. We believe that the main reasons for the company's good cash flow performance in 2023 are: 1) The company's cloud transfer strategy continued to optimize cash flow receipts. The company's total deferred revenue balance at the end of 2023 was 1,218 billion yuan, up 21% year on year, which is significantly better than the company's revenue growth. We believe this is a reflection of the cash flow optimization associated with the company's cloud-to-cloud strategy; 2) Strengthening cost control. The company's total number of employees fell 8% year on year at the end of 2023, and cash expenses for employee remuneration decreased.
Secure GPT: 24 is expected to usher in commercial landing
In recent years, the company has used “AI First” as an innovative research strategy to continuously implement AI technology and capabilities in various products, such as secure GPT, SAVE 3.0, NoDR, AIOps, etc. In May 2023, the company released the self-developed security model “Secure GPT”, becoming the first domestic cybersecurity manufacturer to release a self-developed security model. The company iterated version 2.0 in September 2023, iterated version 3.0 in January 2024, and released the Secure GPT User Experience Report in March 2024. We believe that the company's secure GPT business is expected to reach commercial ground within the year.
Profit forecasting
Considering that the investment of the company's downstream customers is still cautious, the procurement process is getting longer, and demand recovery is slow, we adjusted our previous profit forecast. The company's revenue for 2024-2026 is 81.70, 89.25, and 9.895 billion yuan, respectively, and net profit to mother is 268, 3.90, and 479 million yuan, respectively. Referring to the closing price on April 11, 2024, the corresponding 2024-2026 PE was 91, 62, and 51 times, respectively. At the same time, considering that the company was the first to release in the AI model field, the inflection point in cash flow is now, and the recovery trend is significantly better than the profit side. The closing price on April 11, 2024 corresponds to the 2024-2026 P/OCF of 22, 18, and 14 times, respectively, maintaining a “buy” rating.
Risk warning:
The company's safety GPT R&D implementation fell short of expectations; downstream customer budget recovery fell short of expectations; the company's new business expansion fell short of expectations; gross margin continued to fluctuate due to the impact of the upstream supply chain; and market competition intensified.