Investment events: The company released its 2023 annual report: 2023 operating income of 3.124 billion yuan, down 11.81% year on year; net profit to mother - 371 million yuan, down 281.09% year on year; net profit after deducting non-return to mother - 417 million yuan, down 371.32% year on year.

The growth rate of Xinchuang Safety is remarkable. The company's revenue in 2023 was 3.124 billion yuan, down 11.81% year on year, while Q4's revenue was 1,476 billion yuan, down 29.01% year on year. Mainly because the domestic macroeconomic environment in 2023 was complicated, the industry's recovery was uneven, and the company's new orders in the fourth quarter fell short of expectations. Looking at customers by industry, the revenue of the government and public institutions increased 8.48% year on year, with special industries up 59.05% year on year; state-owned enterprises decreased 26 year on year.

30%, with the carrier industry growing by 23.51% year over year. Looking at the breakdown, during the reporting period, the company's data security revenue increased 6.87% year on year, cloud computing revenue increased 12.17% year on year, and Xinchuang business revenue increased 33.01% year on year.

The net cash flow from operating activities has improved markedly, and the cost control effect is obvious. The company's gross margin in 2023 was 60.19%, up 0.47pcts from the same period in 2022. The net cash flow from the company's operating activities improved markedly during the reporting period. By strengthening the collection of accounts receivable, the company's 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 cash flow from operating activities changed from negative to positive during the reporting period, increasing by about 788 million yuan year on year, with an increase of 290.59%. The company accrued an impairment amount of 443 million yuan on book goodwill, resulting in a net profit loss for the reporting period. If the goodwill impairment factor is excluded, the net profit attributable to shareholders of the listed company during the reporting period was 71.8837 million yuan. The company's cost control effect was obvious. The total cost for the period decreased by 2.57% year on year. Among them, R&D investment had basically been completed due to the new direction, R&D investment had entered a stable period, and R&D expenses fell 6.35% year on year

“Artificial Intelligence+Security” further enhances security service capabilities. 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 systems to provide immediate, accurate, and comprehensive knowledge question and answer services. By the end of the reporting period, the company had applied for more than 260 patents in the field of AI.

Investment advice: Considering that economic recovery falls short of expectations, we adjusted our expectations and forecast that the company's revenue for 2024/2025/2026 will be $36.16/41.22/4.643 billion yuan (the pre-adjusted forecast is 2024/2025 revenue of 58.83 billion yuan and 7.205 billion yuan); the company's net profit to mother is $270/3.53 billion yuan (net profit to mother before adjustment is 596 million yuan and 797 million yuan). Considering the company's layout in terms of AI and data elements and innovation, and achieving effective fee control, a “buy” rating is given.

Risk warning: New market development risk, company business progress falling short of expectations, increased market competition, risk of declining cash flow, risk of economic recovery falling short of expectations.