Incident: The company released its 2023 annual report, achieving operating income of 2,441 billion yuan, a year-on-year decrease of 13.6%; realized net profit of 190 million yuan, a year-on-year decrease of 66.0%; and realized net profit without deduction of 78.821 million yuan, a year-on-year decrease of 80.4%.

Downstream demand-side fluctuations put pressure on revenue in the short term. By business, in 2023, the company's smart procurement business achieved revenue of 1.02 billion yuan, a year-on-year decrease of 16.4%, of which procurement and operation revenue was 360 million yuan, a year-on-year decrease of 26.6%; smart government achieved revenue of 1.06 billion yuan, a year-on-year decrease of 14.5%; and digital construction achieved revenue of 360 million yuan, a year-on-year decrease of 2.6%. Affected by macroeconomic environmental factors, client capital is tight, and the company's overall revenue is under pressure in the short term; however, the performance of various regions is not entirely consistent. For example, revenue in the Northwest China and North China regions is still growing to a certain extent. In addition, the company has not stopped building and promoting its own trading platforms and SaaS-based tools. The tenderer service “Xindian Electronic Trading Platform” added 85 sections, and the number of trading segments on the platform increased by 41% year on year; the total number of “Bid Securities Connect” connected to the bidder service was nearly 500, and the number of registered users increased by 41% year on year. At the same time, the company has been deeply involved in the field of smart procurement for many years, and has obvious competitive advantages in the government and large central and state-owned enterprises. During the reporting period, it added nearly 400 new projects related to public resource transactions, including benchmark projects for large enterprises such as Chinese ships and Chinese building materials. With the resumption of subsequent economic activities, the company's procurement business revenue is expected to return to a rapid growth trajectory.

The prepayment of expenses affected profits, and cash flow performance was good. On the cost side, the company's comprehensive gross margin in 2023 was 61.4%, a year-on-year decrease of 4.60pp. We judge that it was mainly due to the decline in revenue from high-margin operating projects, and the project acceptance progress did not meet expectations, while personnel costs were relatively rigid. On the cost side, the company's sales, management, R&D, and finance expenses in 2023 were 28.6% (+3.76pp), 7.6% (+1.09pp), and 21.0% (+2.41pp), respectively. In terms of cash flow, the company's net cash flow from operating activities in 2023 was 507.33 million yuan, which is still at a healthy level against the trend; sales repayment for the whole year was 2.52 billion yuan, which is basically in line with operating income. We believe that although the upfront investment of expenses affects profit release in the short term, it also paves the way for the conversion of subsequent orders; at the same time, the company has an advantage in cash reserves to protect the development of subsequent business.

The big model was gradually verified and implemented, and public data operations were actively explored. During the reporting period, the company actively explored fields such as AI and big data, developed industry models and intelligent agent frameworks, and combined big model technology with the company's business scenarios to verify and implement applications in government services such as digital people and intelligent documents. In addition, the company launched a comprehensive application solution for public data scenario operation and grassroots data. The first test of the integrated government data center project in Xi'an City was successful, laying the foundation for the development of public data operations. It is expected that replication will be tried in many places in the future, opening up additional room for growth.

Profit forecasting and investment advice. The company's EPS is expected to be 0.81 yuan, 1.19 yuan, and 1.70 yuan respectively in 2024-2026. The company is actively exploring the pilot and implementation of big models and public data operations. The three major businesses of smart government, smart recruitment, and digital construction are all expected to see a recovery in demand, follow-up orders or quarterly repairs, and maintain a “buy” rating.

Risk warning: Risks such as policy progress falling short of expectations; downstream demand falling short of expectations; and increased industry competition.