Case BL:, -11.81% year on year; net profit after non-return to mother - 417 million yuan, -371.32% year on year; comprehensive gross profit margin 60.19%, +0.47pct year on year; sales expenses/ management expenses/ R&D expenses were respectively 9.19/2.17/ 768 million yuan, accounting for 29.41% /6.95%/ 24.60%; net cash flow from operating activities was $517 million, +290.59% year-on-year. The company released a forecast for the first quarter of 2024, and is expected to achieve operating income of 415 to 435 million yuan; net profit to mother of -0.85 to -95 million yuan.

The decline in the company's revenue in '23 was mainly due to Q4 orders falling short of expectations, and the decline in net profit to mother was mainly affected by impairment of goodwill. 2023Q4's new orders fell short of expectations. 2023Q4's revenue in a single quarter was -29.01% year-on-year, and single-quarter revenue accounted for 47% of total annual revenue, affecting full-year revenue performance. The company accrued an impairment amount of 443 million yuan on book goodwill. If the goodwill impairment factor is excluded, the net profit returned to mother in 2023 was 72 million yuan.

The net cash flow from the company's operating activities has improved markedly, and quality and efficiency have been continuously strengthened. By strengthening the collection of accounts receivable, sales activity payback was +19.39%; by strengthening procurement and inventory turnover management, procurement payments were -16.46%; the company continued to improve quality and efficiency, and gross margin increased 0.47pct year-on-year, and the cost control effect was obvious. The total cost for the period was -2.57%. The R&D aspect was basically completed due to the new direction and layout, and R&D investment entered a stable period, and R&D expenses were -6.35%.

The company's data security and cloud computing business is growing steadily. In 2023, the company's data security revenue was +6.87%. The company officially released a privacy computing platform to provide a security guarantee mechanism for the entire data life cycle for the supply and circulation of various data elements; the company led and participated in the formulation of more than 90 national, industry-level and enterprise-level standards related to data security, published more than 20 papers, and applied for more than 290 patents. The company's cloud computing revenue was +12.17%. The company released Tianrongxin Taihang Cloud 4.0, Hyperconvergence 4.0, and Desktop Cloud 4.0, which have undergone new upgrades in terms of stability, performance, ease of use and security integration; the company's core products such as virtualized security elements, cloud host adaptive security protection systems, and container security protection systems have carried out in-depth cooperation with many cloud vendors.

The company launched the Tianwen Big Model. Tianwen is capable of risk prediction, security analysis, intelligence extraction, knowledge generation, logical reasoning, and decision-making actions. Through continuous learning and optimization, it can monitor and warn cyber attacks in complex scenarios in real time. By the end of 2023, the company had applied for more than 260 patents in the field of AI.

Profit forecast: As the downstream recovery of the cybersecurity industry falls short of expectations, we adjusted our net profit forecast for 2024/2025/2026 to $22/2.74 billion, giving it a “buy” rating.

Risk warning: Industry development, company business progress, profit forecasts and valuations fall short of expectations.