Incident: Telecom Network Security released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 3,073 billion yuan, a year-on-year decrease of 10.62%; net profit to mother was 349 million yuan, an increase of 13.74% year-on-year, in line with market expectations. In Q1 2024, we achieved revenue of 128 million yuan, a year-on-year decrease of 68.94%, and net profit to mother of 194 million yuan. Losses increased 423.69% year-on-year, lower than market expectations.
Key points of investment
Both gross margin and expense ratio have increased: the company's 2023Q4 revenue was 1.351 billion yuan, down 2.01% year on year, and net profit to mother was 273 million yuan, up 6.10% year on year. By business, cryptographic systems business revenue was 1,475 billion yuan, up 10.45% year on year, gross profit margin was 56.91%, up 2.57 pct year on year; network security business revenue was 1,470 billion yuan, down 21.96% year on year, gross profit margin was 27.90%, up 3.90 pct year on year; data security business revenue was 128 million yuan, down 41.54% year on year, gross profit margin was 39.92%, up 1.89pct year on year; the company's gross profit margin in 2023 was 42.33%, up 5.65 pcts year on year. In terms of cost ratio, sales expense ratio was 11.61% (YoY +1.89pct), management expense ratio 5.82% (YoY +0.58pct), R&D expense ratio 13.76% (YoY +2.89pct). Overall cost ratio increased slightly.
Actively lay out new business directions: Facing the security requirements of new facilities, new scenarios and new business in the development process of digital China, the company vigorously develops product layout in vehicle network security, satellite internet, artificial intelligence, and cloud security. In terms of vehicle networking safety, smart vehicle networking safety technology research and product development are carried out around the integrated safety requirements of “vehicle, road, cloud, and network”. In terms of satellite Internet security, research on key technologies such as identity authentication and key management for the heterogeneous multi-network integration of satellite Internet, and security resource security for the differentiated needs of users is carried out focusing on security requirements in various aspects such as satellite terminals, satellite itself, space-ground links, ground facilities, applications, and data. In terms of artificial intelligence, we are committed to artificial intelligence to enable data security, carry out research on generative AI large model technology for the security field, and develop our own AI artificial intelligence platform around the core requirements of “intelligent application+intelligent security” to enhance capabilities such as safe data processing, security model construction, and model reasoning capabilities. In terms of cloud security, it undertook cloud security application demonstration projects in specific fields. Through ecological concentration with nearly 20 manufacturers, it formed an overall Xinchuang cloud security plan to develop products such as desktop virtualization and can be replicated and promoted, and obtained the first batch of relevant product qualifications such as desktop virtualization and server virtualization.
Profit forecast and investment rating: National policies, information technology development and business layout expansion are expected to continue to drive the company's development. Considering the recovery progress of overall security requirements, we lowered the company's 2024-2025 EPS forecast from 0.62/0.79 to 0.51/0.63 yuan, and the forecast EPS for 2026 is 0.77 yuan. Maintain a “buy” rating.
Risk warning: Competition in the industry is intensifying, and policy progress falls short of expectations.