Event: The company released its annual report for 2023 and the first quarter of 2024. In 2023, the company achieved operating income of 828 million yuan, an increase of 37.71% year on year; realized net profit of 61 million yuan, an increase of 922.84% year on year; realized net profit without deduction of 78 million yuan, and loss increased 15.32% year on year. In the first quarter of 2024, the company achieved operating income of 120 million yuan, an increase of 3.84% year on year; realized net profit to mother of 0.26 million yuan, and loss increased by 44.94% year on year; realized net profit deducted from non-mother - 78 million yuan, an increase of 53.32% year on year.

Annual Report: Overseas revenue performance was impressive, and gross margin declined after the acquisition of Bochao. In 2023, the company achieved operating income of 828 million yuan, up 37.71% year on year; among them, the commercial market achieved revenue of 500 million yuan, up 43.66% year on year; the education market achieved revenue of 166 million yuan, up 4.87% year on year, and overseas revenue of 157 million yuan, up 71.14% year on year, impressive performance; realized net profit of 61 million yuan, up 922.84% year on year; realized net profit without return to mother of 78 million yuan, an increase of 15.32% year on year; the company's gross margin was 93.67%. A decrease of 4.82 percentage points compared to the same period last year. The company's operating costs increased significantly compared to the same period last year, increasing by 42.618,400 yuan, or 437.94%. The main reason was the acquisition of Beijing Bochao and included a cost of 346.09 million yuan. Beijing Bochao undertook many commissioned development and technical service projects during the reporting period, and customized delivery services led to lower gross margins. In terms of cost ratio, sales expenses increased by 96.6434 million yuan over the previous period, up 26.34% year on year. Management expenses increased by 31.595 million yuan over the same period last year, up 51.10% year over year. The main reason for the increase was the increase in management personnel and the increase in brokerage fees related to acquisitions. R&D expenses increased by 101 million yuan over the same period last year, up 35.07% year on year. The main reason was the increase in compensation and benefits due to the sharp increase in the company's R&D personnel. Sales/management/R&D expenses were 52.54%/11.42%/47.09%, respectively. Compared with the same period last year, sales expenses and R&D expenses decreased, and management expenses increased slightly.

Quarterly Report: Performance is under pressure, and gross margin has rebounded steadily. In the first quarter of 2024, the company achieved operating income of 120 million yuan, an increase of 3.84% year on year; realized net profit of 0.26 million yuan, and loss increased by 44.94% year on year; realized net profit deducted from mother - 78 million yuan, an increase of 53.32% year on year; gross margin was 95.12%, up from the annual report. The sales expense ratio was 69.41%, up 2.38 percentage points year on year, the management expense ratio was 27.32%, up 12.34 percentage points year on year, and the R&D expense ratio was 84.21%, up 16.5 percentage points year on year.

Acquisitions enhance product strength, and domestic design software leaders can be expected in the future. The company improved and enhanced its product layout through the acquisition of British CHAM and Beijing Bochao. CHAM is an established developer of commercial fluid simulation software. This acquisition officially brings Zhongwang Software into the field of commercial fluid simulation. CHAM has accumulated deep technology in the CAE field. The founder, Dudley Brian Spalding, is one of the most influential figures in the field of computational fluid mechanics. This acquisition has completed the last piece of the puzzle in the three fields of physics simulation in Zhongwangduo, strengthening the company's competitiveness in CAE products. The acquisition of Bochao is one of Zhongwang Software's major initiatives for the engineering and construction industry to support the industry's 3D digital solutions through domestic CAX technology bases. In addition, Zhongwang Software also plans to acquire the remaining 35% of Beijing Bochao's shares in batches between 2024-2026, so that the target company will eventually become a wholly-owned subsidiary of Zhongwang Software. This shows that Zhongwang Software is committed to deeply integrating resources and improving service capabilities and market competitiveness.

Investment advice: We expect the company's 2024-2026 revenue to be 979/12.05/1,513 million yuan, and the company's 2024-2026 EPS is expected to be 0.53/0.60/0.69 yuan, with corresponding price-earnings ratios of 157.03X/140.44X/121.96X, respectively. As a leading company in the CAX field, the company is expected to open up space with continuous improvement in localization and market penetration. We are optimistic about long-term development and maintain the “recommended” rating.

Risk warning: risk of management collaboration after acquisition; risk of declining gross margin; risk of downstream prosperity falling short of expectations; risk of limited market space.