Event: The company released its 2023 annual report and its earnings forecast for the first quarter of 2024. In 2023, the company achieved operating income of 3.124 billion yuan, yoy -11.81%, realized net profit of 371 million yuan, yoy -281.09%, realized net profit without deduction of 417 million yuan, yoy -371.32%. According to the forecast for the first quarter of 2024, it is expected to achieve operating income of 415 to 435 million yuan, net profit loss of 85 to 95 million yuan, and net profit loss of 91-101 million yuan after deducting non-return net profit loss.

Macro fluctuations compounded goodwill impairment, putting pressure on results for the full year of 2023. Affected by macroeconomic fluctuations, the industry's recovery was uneven. The company's new orders in the fourth quarter of 2023 fell 11.81% year on year, but revenue from government and public institutions increased 8.48% year on year, with special industries up 59.05% year on year; state-owned enterprises fell 26.30% year on year, of which the operator industry grew 23.51% year on year. The company expects the market environment and business development to gradually improve in 2024, and industry demand continues to recover, but it will take time to return to a higher growth rate. The development pace forecast previously made was adjusted. For this reason, an impairment amount of 443 million yuan was calculated for book goodwill, resulting in a net profit loss due to the full year of 2023. If the goodwill impairment factor is excluded, the net profit due to mother in 2023 was 71.8837 million yuan.

Continue to improve quality and efficiency, and improve cash flow. 1) In 2023, the company's gross margin increased by 0.47 percentage points year on year, and the cost control effect was obvious. The total cost for the period decreased by 2.57% year on year. Among them, due to the new direction layout, the R&D sector has basically been completed, investment has entered a stable period, and R&D expenses decreased 6.35% year on year. At the same time, the company strengthened collection of accounts receivable, and sales activity payback increased 19.39% year over year; by strengthening procurement and inventory turnover management, procurement payments decreased 16.46% year over year. Net operating cash flow changed from negative to positive in 2023, with a year-on-year increase of 790 million yuan, an increase of 290.59%. 2) In the first quarter of 2024, the company's revenue quality continued to improve. Gross margin increased by more than 13 percentage points year on year, R&D expenses and management expenses continued to decline, R&D expenses decreased by about 7% year on year, and management expenses decreased by about 23% year on year. The net profit loss for the first quarter of 2024 was in line with the seasonal characteristics of the cybersecurity industry. The amount of loss was basically the same year on year. Without considering the impact of the reduction in value-added tax rebates, net profit attributable to shareholders of listed companies decreased by about 30% year-on-year.

AI technology is deeply integrated with cybersecurity to launch the Tianwen Big Model. The company applies AI technology capabilities to the company's cybersecurity products, threat intelligence, and knowledge base, and provides users with threat intelligence and knowledge bases in the form of subscription services. The company's subscription service has continued to grow over the years. During the reporting period, more than half of the company's subscription service content came from AI production knowledge. In 2023, the company officially launched the Tianwen Model, which has the capabilities of risk prediction, security analysis, intelligence extraction, knowledge generation, logical reasoning, and decision action. Through continuous learning and optimization, it can monitor and warn cyber attacks in complex scenarios in real time and build a stable security barrier. The company released the Tianwen System, which relies on Tianwen's large model capabilities to cover various scenarios including network security solutions, product function configuration, troubleshooting, etc., and is used in products such as database audit and protection, vulnerability scanning and management systems, and Tianwen Big Data Analysis System to provide immediate, accurate, and comprehensive knowledge question and answer services.

Maintain a “buy” rating. The company continues to improve quality and efficiency, and forwardly lays out emerging security fields such as AI security, which is expected to form a new growth curve. Since it will take some time for downstream demand in the cybersecurity industry to recover, we have adjusted the company's profit forecast. We expect 2024-2026 revenue of 35.64/41.67 billion yuan and net profit of 2.87/4.06/530 billion yuan to maintain the “buy” rating.

Risk warning: Competition increases risk; downstream demand recovery falls short of expectations; growth in new areas falls short of expectations.