23 Revenue for the whole year still achieved nearly 10% growth. The industry-leading company released its 2023 annual report, achieving operating income of 2.17 billion yuan, an increase of 9.60% over the previous year, and net profit to mother of 360 million yuan, an increase of 41.97% year-on-year losses. Among them, 23Q4 revenue was 963 million yuan, up 2.38% year on year, and net profit to mother was 176 million yuan, down 13.65% year on year.

Operating cash flow in 2023 was -256 million yuan, compared to -179 million yuan for the same period in '22. In 2023, the company's revenue from sales of goods and services was 2.32 billion yuan, an increase of 16.18% over the previous year. We expect demand from the company's downstream customers to recover at an accelerated pace in 24. We expect revenue for 2024-26 to be 25.35/29.86/35.47 billion yuan, respectively. Referring to comparable company Wind's agreed average of 2.4 times 24 PS, considering that the company has not yet made a profit without a premium, the company will be given 2.4 times 24 PS and a target price of 76.64 yuan to maintain the purchase rating.

Security services have driven the company's overall revenue growth. Cost control is showing initial results. The company's annual gross margin in 2023 was 61.78%, down 2.41 pct year on year. Sales/management/R&D rates were 41.86%/8.50%/29.33%, respectively, and 1.23/1.16/3.29 pct year on year. The number of employees in the company was 3,874, a year-on-year decrease of 10.94%. The per capita income was 560,200 yuan, an increase of 110,000 yuan over the previous year. Looking at the revenue structure, the company's cybersecurity service revenue was 827 million yuan, +24.41%, gross profit margin -1.61 pct; cybersecurity platform revenue was 779 million yuan, +1.31% year on year, gross profit margin 70.36%, -1.52 pct year on year; revenue from basic cybersecurity products was 455 million yuan, -2.29% year on year, gross profit margin 76.64%, +1.18 pct year on year; third-party hardware product revenue was 58 million yuan, +14.20% YoY, gross profit margin 1.27%, YoY- 14.93pct

Combining the safety pendant model with multiple products enabled the company to achieve results. In 2023, the company developed the safety pendant model “Everbrain” and achieved a series of results. Hengnao won the gold medal in the national finals of the Shengteng AI Innovation Competition, and was also used in many important events such as the Asian Games. During the reporting period, Hengneng helped improve the quality and revenue of Anheng's security products: the combination of Hengbrain and MSS security operation platforms improved security operation efficiency by more than 75%, and advanced threat detection capabilities increased MSS revenue by more than 300% year on year; Hengbrain combined with data classification and classification products, the recognition rate increased by nearly 100%, accuracy increased by 300%, and efficiency increased by 30 times; when combined with API security products, its security operation efficiency increased by 90%.

24Q1 cost reduction and fee control were obvious, and the operating pressure gradually decreased

The company released its 2024 quarterly report, achieving operating income of 281 million yuan, a year-on-year decrease of 16.47%, and a net profit of 200 million yuan to mother, an increase of 5.75% year-on-year losses. 2024Q1's gross margin was 49.90%, down 6.51pct year on year, and sales/management/ R&D rates were 59.08%/13.94%/48.02%, respectively, down 4.17/0.65/0.23pct year on year. In the first quarter of 2024, sales, management, and R&D expenses were reduced by a total of 19.81%. This is the biggest drop in the company's expenses in the past five years. Cost reduction and cost control efforts are obvious, which is conducive to reducing the pressure on the company's operations.

Risk warning: The progress of the data security business fell short of expectations, and competition in the industry intensified.