Incident: Xindalu released its 2023 annual report. In 2023, the company achieved revenue of 8.250 billion yuan, up 11.94% year on year; realized net profit of 1,004 billion yuan, up 362.91% year on year; realized deducted non-net profit of 1,084 billion yuan, up 136.82% year on year; achieved net operating cash flow of 2,227 billion yuan, an increase of 113.16% year on year, and net operating cash flow more than double the net profit to mother. In addition, the company continued to increase the level of return to investors, and the total cash dividend for the full year of 2023 reached 5.00 yuan per 10 shares (tax included). Looking at 2023Q4 alone, the company achieved revenue of 2,366 billion yuan, a year-on-year increase of 28.44%; realized net profit of 185 million yuan, an increase of 124.59% over the previous year; realized deducted non-net profit of 194 million yuan, turning a year-on-year loss into a profit.

The POS sales business was under pressure in the short term, and the payment business achieved a “sharp rise in volume and price.” In 2023, by product, (1) Smart terminal cluster business: The company's smart terminal cluster business achieved revenue of 3.199 billion yuan, a year-on-year decrease of 4.07%, mainly due to the contraction of the domestic market due to short-term factors. The gross margin of the smart terminal cluster business reached 37.68%, an increase of 4.41 percentage points over the previous year. In terms of hardware POS shipments, according to Nielsen's 2023 data, the company ranked first in the world in POS shipments in 2022, with 7 million POS units shipped in 2023, of which 3.5 million were shipped overseas. In the face of a decline in overall domestic demand, the company continues to increase the popularity rate of intelligent POS machines. In 2023, global smart POS shipments increased by more than 90% year-on-year, and the company's smart POS line was selected as one of the top five state-owned banks. (2) Industry digital cluster business: The company's industry digital cluster business achieved revenue of 5,037 billion yuan, an increase of 25.35% over the previous year, mainly due to third-party payments entering an inflection point in the industry and supply side clearing. Among them, merchant operations and value-added business achieved revenue of $3,883 billion, an increase of 33.57% over the previous year. The gross margin of merchant operations and value-added business reached 41.19%, an increase of 13.99 percentage points over the previous year. Furthermore, by the end of 2023, the company had served more than 3.7 million merchants, the ARPU value of a single merchant reached 295 yuan/year, bank cooperation turnover exceeded 680 billion yuan, and merchant subsidies exceeded 700 million yuan. In terms of turnover scale, the total volume of payment service business transactions for the full year of 2023 exceeded 2.5 trillion yuan, an increase of 8% over the previous year. We believe that in terms of hardware POS sales, although the demand side is affected in the short term, the company is making efforts to increase the overall gross profit margin of the business. If domestic POS demand picks up in the future, the company's POS sales business is expected to return to a rapid growth trajectory. In terms of payment business, we believe that the increase in gross margin of the payment business is due to rate increases, and it is expected that the growth logic of “rate increasing+increase in turnover scale” will continue to be reflected in the future.

Entering the 2.0 stage of internationalization, we will focus on expanding value-added overseas payment services in the future. In 2023, the company officially entered the 2.0 stage of internationalization of all elements such as technology, service, and organization. In 2023, the company established 5 new subsidiaries around the world and expanded its business footprint to more than 100 countries and regions. In 2023, the company's overseas sales revenue reached 2,253 billion yuan, an increase of 8.69% over the previous year, and overseas business revenue accounted for more than 70% of the cluster's revenue. By region, the company achieved revenue of nearly 200 million yuan in the Asia-Pacific region (excluding mainland China), an increase of 179% over the previous year; the Latin American market has maintained steady growth, and the company has served the five major Brazilian banks and dominates the Brazilian market; sales revenue in the Middle East and Africa region has exceeded 400 million yuan; and sales revenue growth in Europe reached 28%. We believe that in the past, the company's revenue source in overseas regions was mainly POS hardware sales. In the future, as the company's internationalization strategy progresses and the digital payment business penetrates, the company's overseas business is expected to become an important increase in the company's future growth.

The cost growth rate is reasonable, and the labor efficiency index has reached a record high. In 2023, in terms of expenses, the company's sales expenses, management expenses, and R&D expenses were 391/5.41/632 million yuan respectively, with year-on-year changes of +7.94%/+4.44%/-3.76%, respectively. In terms of personnel efficiency, the company generated 1,257,400 yuan in revenue per capita and 153,000 yuan in profit per capita. Both indicators of human efficiency reached the highest value since the company went public. By the end of 2023, the total number of companies was 6561, down 59 from the end of 2022.

Profit forecast: We expect EPS to be 1.25/1.55/1.84 yuan in 2024-2026, and the corresponding PE will be 14.11/11.38/9.59 times.

Risk warning: Market competition intensifies, overseas market expansion falls short of expectations, and technological development falls short of expectations.