Incident: Tianrongxin released the 2023 annual report and performance forecast for the first quarter of 2024. In 2023, the company achieved revenue of 3.124 billion yuan, a year-on-year decrease of 11.81%; realized net profit to mother of -371 million yuan, a year-on-year decrease of 281.09%; realized deducted non-net profit of 417 million yuan, a year-on-year decrease of 371.32%; and achieved a net operating cash flow of 517 million yuan, an increase of 290.59% over the previous year. By the end of 2023, the company's contract debt was 195 million yuan, an increase of 36.50% over the previous year. Looking at 2023Q4 alone, the company achieved revenue of 1,476 billion yuan, a year-on-year decrease of 29.01%; realized net profit to mother - 123 million yuan, a year-on-year decrease of 119.70%; and realized deduction of non-net profit - 153 million yuan. With 2024Q1, the company expects to achieve revenue of 415 million yuan to 435 million yuan, a year-on-year change of -11.42% to -7.15%; the company expects to achieve net profit of -95 million yuan to -85 million yuan, a year-on-year change of -4.11% to +6.85%; deducted non-net profit of -101 million yuan to -0.91 million yuan, a year-on-year change of -4.32% to +6.01%.

The new business direction maintained steady growth, and impairment of goodwill dragged down apparent profits. In 2023, by product, the company's basic security products achieved revenue of 2,159 billion yuan, a year-on-year decrease of 11.30%; big data and situation awareness products and services achieved revenue of 230 million yuan, a year-on-year decrease of 33.35%; basic security services achieved revenue of 403 million yuan, a year-on-year decrease of 8.63%; and cloud computing and cloud security products and services achieved revenue of 322 million yuan, an increase of 0.84% year on year. Looking at the industries where downstream customers are located, government and public sector customers achieved revenue of 1,427 billion yuan, an increase of 8.48% year on year, of which special industry increased 59.05% year on year; state-owned enterprise customers achieved revenue of 894 million yuan, down 26.30% year on year, of which the operator industry increased 23.51% year on year; commercial and other customers achieved revenue of 793 million yuan, down 21.5% year on year. In terms of new business direction, the company's Xinchuang business revenue increased 33.01% year on year in 2023; data security business revenue increased 6.87% year on year; and cloud computing revenue increased 12.17% year on year. In terms of gross margin, the company's gross margin in 2023 was 60.19%, an increase of 0.47 percentage points over the previous year. On the profit side, the company's net profit declined to a certain extent in 2023. One of the reasons was that the company maintained a cautious and optimistic attitude about the recovery in industry demand, so goodwill deducted value. The amount of impairment was 443 million yuan. Excluding goodwill impairment factors, the company's net profit in 2023 was $72 million.

Expense side control was good, and operating cash flow improved markedly. In 2023, the company continued to reduce costs and increase efficiency. In terms of expenses, the company's sales expenses, management expenses, and R&D expenses were 919/2.17/768 million yuan respectively. The year-on-year changes were +13.17%/-32.58%/-6.35%, respectively, and the overall three fees decreased by 2.57% year on year. Among them, the increase in sales expenses was mainly due to the company's optimism about the recovery in demand at the beginning of the year and increasing investment on the sales side. The decrease in R&D expenses was mainly due to the company's early R&D investment layout being basically completed, and the reduction in R&D expenses. In terms of operating cash flow, the company achieved net operating cash flow of 517 million yuan in 2023, an increase of 788 million yuan over the previous year, with a growth rate of 290.59%. The main reasons are: (1) the company strengthened repayment management, and sales repayment increased 19.39% year on year; (2) the company strengthened procurement and inventory management, and purchase payments decreased 16.46% year on year. We believe that the company's cost control continues to be optimized, and pre-R&D investment has basically been completed, so the profit side is expected to be released in the future. Furthermore, the company's cash flow has improved dramatically, which also reflects the company's strong operational resilience and quality of operations.

24Q1: Improved revenue quality and continued refined operations. 2024Q1. In terms of revenue measurement, the company continued to improve quality and efficiency, and revenue quality improved significantly. 24Q1 gross margin increased 13 percentage points year on year. Despite the decline in overall revenue, gross profit increased by more than 15% year on year. On the cost side, the company continued to improve quality and efficiency. R&D expenses decreased by about 7% year on year, and management expenses decreased by about 23% year on year. On the profit side, due to the seasonal characteristics of the cybersecurity industry, the company's net profit loss in the first quarter was basically the same as the previous year. Without considering the impact of reduced value-added tax rebates, net profit attributable to shareholders of listed companies decreased by about 30% year-on-year.

Profit forecast: We believe that the recovery of downstream demand in the cybersecurity industry in 2023 fell short of expectations, compounding the double impact of the company's goodwill calculation and impairment, putting pressure on the company's revenue and profit side. However, the company continues to consolidate revenue quality, focus on refined internal management, and strengthen repayment management, showing strong operational resilience. If downstream demand improves in the future, the company is expected to return to a rapid growth trajectory. We expect EPS in 2024-2026 to be 0.27/0.38/0.52 yuan, respectively, and the corresponding PE will be 21.32/15.11/11.02 times.

Risk warning: Downstream spending improvements fall short of expectations, new technology development falls short of expectations, and market competition intensifies.