The company's revenue and net profit performance in 2023 fell short of our expectations, Newpoint Software released its 2023 annual results: the company's operating income in 2023 was 2.441 billion yuan, -13.6% year over year; net profit to mother was 194 million yuan, -66.1% year over year. Due to the number of tenders and order acceptance progress falling short of expectations, the company's 2023 revenue and profit performance fell short of the market and our expectations. Looking at a single quarter, 4Q23 revenue was 1,063 million yuan, -13.3% YoY; net profit to mother was 283 million yuan, -28.0% YoY.

Development trends

Revenue for the year fell short of expectations or stemmed from the number of tenders and order acceptance progress falling short of expectations. The company's 2023:1) Smart procurement revenue was -16.38% to 1.02 billion yuan; of which revenue from recruitment and operation was -26.63% to 360 million yuan. We believe that the decline in recruitment operating revenue was mainly affected by a decrease in the number of tenders opened on bidding platforms; 2) Smart government revenue was -14.49% to 1.06 billion yuan. We believe that procurement project revenue and smart government-related project business were affected by external environmental factors and client financial constraints. The project acceptance process may be extended, which may have a certain impact on revenue recognition; 3) Digital construction revenue Compared to -2.63% to 360 million yuan, we believe that the company's digital construction business revenue may be under pressure due to the impact of downstream project commencement.

The decline in revenue led to a decline in gross margin and control the increase in expenses. 2023: The company's gross margin was -4.6ppt to 61.4% year on year. We think it is mainly due to the decline in smart government business revenue, which led to a 7.3ppt year-on-year decline in gross margin revenue, and a decline in the share of revenue from high-margin recruitment operations; in terms of expenses, sales, management, and R&D expenses were -0.3%/+1.0%/-2.4%, respectively. Furthermore, the number of sales and management employees at the end of '23 was -12.7%/-13.4% compared to the beginning of the year. We believe the company continues to strengthen personnel cost control.

The project-based business still needs to be repaired, and procurement services may benefit from the market-based trend of transactions. Looking ahead to 2024, on the one hand, there is a certain correlation between the software part of the procurement operation and digital construction indicators. We believe that the company's smart procurement business may continue to benefit from the market-based trend of bidding transactions; on the other hand, procurement platform construction and smart government business were affected to a certain extent by new orders signed last year. Considering the 15.4% year-on-year decrease in the company's contract debt and the decline in new orders in 2023, the company's revenue from the project system business in 2024 is still under some pressure, and the repair is still to be observed during the year.

Profit forecasting and valuation

Considering that the downstream bidding project fell short of expectations and the risk of client repayment, we lowered the company's net profit forecast for 2024 by 60.9% to $231 million, and first introduced the company's 2025 net profit forecast of 347 million yuan. Maintaining an outperforming industry rating, the company's current stock price corresponds to 31.3/20.8 times the 24/25E price-earnings ratio. Considering the decline in the government IT sector's valuation center and the company's 2024 orders still need to be repaired, we lowered our target price by 36.0% to 32.0 yuan corresponding to 30.4 times the 2025 price-earnings ratio, which has 46.1% upside compared to the current stock price.

risks

The resumption of procurement activities fell short of expectations, and the project acceptance progress fell short of expectations.