Matters:

On April 19, 2024, the company released its 2023 annual report and performance forecast for the first quarter of 2024: in 2023, it achieved operating income of 3.124 billion yuan, a year-on-year decrease of 11.81%; net profit loss to mother of 371 million yuan, profit of 205 million yuan for the same period last year; loss of non-net profit deducted from mother was 417 million yuan, and profit of 154 million yuan for the same period last year. In the first quarter of 2024, revenue is expected to be 415 million yuan to 435 million yuan, down 7.15% to 11.42% year on year; net profit loss due to mother was 85 million yuan to 95 million yuan, a loss of 91 million yuan in the same period last year; loss after deducting non-net profit of 91 million yuan to 101 million yuan, and a loss of 97 million yuan for the same period last year.

Commentary:

Revenue is under pressure in the short term, and profitability has increased. In 2023, the company's performance was under pressure in the short term. By product, basic security products achieved revenue of 2.559 billion yuan, down 11.30% year on year; big data and situation awareness products and services achieved revenue of 230 million yuan, down 33.35% year on year; basic security services achieved revenue of 403 million yuan, down 8.63% year on year; and cloud computing and cloud security products and services achieved revenue of 322 million yuan, up 0.84% year on year. In terms of gross margin, gross margin in 2023 was 60.19%, up 0.47pct year on year; in the first quarter of 2024, it increased 13pct year on year, gross profit increased by more than 15% year on year, and revenue quality improved significantly. On the profit side, net profit to the mother declined in 2023. One of the main reasons was that the company maintained a cautious and optimistic attitude about the recovery in industry demand, so goodwill calculation was reduced. The amount of impairment was 443 million yuan. Excluding goodwill impairment factors, the company's net profit in 2023 was $72 million.

The cost side continues to be optimized, and channel expansion progresses smoothly. In terms of costs, total expenses decreased by 2.57% year on year. Among them, R&D investment has basically been completed due to the new direction, R&D investment has entered a stable period, and R&D expenses have decreased 6.35% year on year. Sales expenses increased 13.17% year over year, mainly due to the company's optimistic recovery in industry demand at the beginning of the year and increasing investment on the marketing side. Currently, channel expansion is progressing smoothly. It has 3,486 certified industry and commercial partners, covering the municipal government, health care, education, and enterprise markets, with a market coverage of over 90% in cities and counties.

Help enterprises digitally transform and continue to develop new security businesses. The company actively lays out new directions, new products and new businesses, continuously innovates R&D, enriches product lines, continuously improves product quality and performance, improves solutions, improves service capabilities, meets customer needs, and expands market share. Among them, in the AI+ security field, the company has formed rich technical achievements in the fields of detection and analysis of malicious samples, detection and traceability of attack behavior, security intelligence reasoning and generation, automated vulnerability mining and evaluation, and intelligent security services and operation, and has launched the Tianwen Big Model and Tianwen System to empower the company's full range of products.

Investment advice: Considering the overall pressure on the cybersecurity industry in 2023, we adjusted the profit forecast. The company's revenue distribution for 2024-2026 is 36.33/41.69/4.713 billion yuan (the original value in 2024-25 was 5.801/7.256 billion yuan), corresponding growth rate of 16.3% /14.8%/13.1%; net profit to mother is 2.95/415/527 million yuan (original value of 600/777 million yuan in 2024-25), with a year-on-year loss of 40.9%/ 27.1%; corresponding EPS (diluted) is 0.25/0.35/0.45 yuan respectively (original value 0.51/0.66 yuan in 2024-25). In terms of valuation, with reference to comparable companies, we gave the company 35x PE in 2024, corresponding to a target price of 8.75 yuan, maintaining the “recommended” rating.

Risk warning: Industry competition intensifies; policy promotion falls short of expectations; product application falls short of expectations.