Incident: On the evening of April 15, Nencke Technology released its 2023 annual report. The company achieved revenue of 1,410 billion yuan, up 14.13% year on year; realized net profit of 220 million yuan, up 10.71% year on year; realized deducted non-net profit of 208 million yuan, up 11.50% year on year; net interest rate to mother was 15.57%, down 0.47 percentage points year on year; cash flow from operating activities was 315 million yuan, up 183.86% year on year.

The company accelerates new industrialization and develops “AI+ industrial software technology” to drive revenue growth. In terms of revenue, the company achieved revenue of 1.41 billion yuan in 2023, an increase of 14.13% over the previous year. By industry, the central enterprise heavy industry achieved revenue of 478 million yuan, accounting for 33.87% of total revenue, down 10.49%; the equipment manufacturing industry achieved revenue of 300 million yuan, accounting for 21.26% of total revenue, up 151.84% year on year; the semiconductor electronics industry achieved revenue of 267 million yuan, accounting for 18.93% of total revenue, up 0.74% year on year; the automobile and rail transit industry achieved revenue of 198 million yuan, accounting for 14.93% of total revenue, up 21.76% year on year; energy power industry achieved revenue of 133 million yuan, accounting for total revenue of 133 million yuan, accounting for total revenue Revenue 9.45%, up 12.09% year on year; the consumer goods industry achieved revenue of 0.27 million yuan, accounting for 1.92% of total revenue, down 5.46% year on year; by product: software systems and services achieved revenue of 525 million yuan in 2023, down 30.78% year on year, gross margin of 36.58%; cloud products and services (self-research) achieved revenue of 430 million yuan, up 109.23% year on year, gross margin of 58.4%; industrial engineering and industrial electrical products and services achieved revenue of 428 million yuan, up 179.84% year on year. The gross margin was 59.96%; the AI computing power base and AI industry applications achieved revenue of 0.2 billion yuan, with a gross margin of 25%.

In terms of gross margin, the company's comprehensive gross margin in 2023 was 50.18%, an increase of 6.19 percentage points over the previous year. Thanks to the continuous implementation of the company's self-developed products, the promotion of the company's cloud products and services and industrial engineering and industrial electrical products and services reduced business costs, and gross profit increased accordingly. In terms of the cost ratio for the period, the sales expense ratio was 6%, down about 0.23 percentage points from the previous period; the management expense ratio was 6.54%, down 1.5 percentage points from the previous period, mainly due to a reduction in depreciation, amortization expenses, and intermediary agency fees; and the R&D expense ratio was 11.39%, up 1.4 percentage points from the previous period, mainly due to the increase in employee remuneration.

The company's core technological advantages of independent innovation are becoming more and more evident, and the scale of revenue from cloud products and services is growing. The company's “Le World” products are widely recognized by central enterprises, heavy industry, semiconductor electronics and other industries. Revenue from cloud products and services doubled in 23 years, achieved revenue of 430 million yuan, and the business share also increased to 30%. Cloud products and services have become the main factor driving the company's performance growth. In 2023, the company successfully completed the fund-raising and construction of industrial software products independently developed by “Le World” (Lecang, Lezuo, Lexu, LeYan, Music, and post-factory manufacturing), released a new version of R2V2, formed a unified data management platform for the entire life cycle data of R&D, process, production, operation and maintenance of products, and built a platform-based and cloud-service-oriented product system for autonomous and controllable central and front-end applications.

The company continues to deepen strategic cooperation with manufacturers such as Huawei to continuously enhance the competitive advantage of its products. After three years of strategic layout, the company built a full “Nengke+Huawei” cooperation chain, formed a structured support and implementation team for the Huawei business, and joined the Huawei, Siemens, Amazon and other ecosystems. In the Huawei ecosystem, the company's “Le World” products are efficiently collaborated with Huawei's hardware development production lines and software development production lines. Through artificial intelligence technology, “Le World” products are deeply integrated with AI computing power bases, large models, and software development tool chains to create a new paradigm for the application of big models in the manufacturing industry. They have the ability to use generative AI+ industrial software industry digital solutions, and build AI applications in R&D and design, manufacturing, and operation and maintenance services for industrial enterprises.

Achieve technological breakthroughs in industrial electricity-related fields and drive business revenue growth. Revenue from industrial engineering and industrial electrical products and services in 2023 was $428 million, an increase of about 180% over the previous year. Related products have been localized and replaced with imported equipment and are used in nuclear power, mining, metallurgy, energy and chemical industries. The leading products, high-capacity high-voltage inverters, are in a leading position in the industry. The company's 80MVA high-capacity LNG electric drive high-voltage inverter has achieved a breakthrough in high-end equipment, and has obtained ETL certification, CE certification and SIL certification. Domestic and foreign markets continue to expand, there are sufficient orders on hand, and the competitive advantage of products has been significantly strengthened.

Profit forecast and investment rating: We expect the EPS for 2024-2026 to be 1.79/2.38/3.11 yuan, respectively, and the corresponding PE is 17.85/13.42/10.30 times. Maintain a “buy” rating.

Risk warning: 1. The market expansion of self-developed products falls short of expectations; 2. Market competition intensifies and product and service prices fall; 3. The progress of informatization promotion in military, high-tech electronics, equipment manufacturing and other industries falls short of expectations; progress in the implementation of 4.AI falls short of expectations.