The company's 2023&1Q24 results are in line with our and market expectations

Neusoft Group announced its 2023 results: achieving revenue of 10.544 billion yuan, +11% year over year; net profit to mother of 74 million yuan, turning profit year on year; net profit not attributable to mother - 147 million yuan to reduce losses. Looking at the 4Q23 single quarter, we achieved revenue of 4.281 billion yuan, +10% year-on-year; net profit to mother - 61 million yuan, net profit after deducting non-return to mother - 189 million yuan, a year-on-year reduction in losses, in line with our and market expectations.

1Q24 performance: Achieved revenue of 1.83 billion yuan, +11% year on year; net profit to mother of 0.05 billion yuan, +4% year on year; net profit after deducting non-return to mother - 0.09 billion yuan, narrowing losses, in line with our and market expectations.

Development trends

Innovative business investment losses reduced losses; new strategic direction set sail. In 2023, the company's comprehensive gross margin increased slightly by 3.4 ppt year on year; overall losses of innovative business subsidiaries decreased, investment losses in joint ventures decreased by about 27% year on year, and net profit maintained positive growth. Coupled with the company's strengthened project management, its operating cash flow reached 798 million yuan in 2023, +19% year over year, returning to the best level in history. In 2023, innovative business subsidiaries had a negative impact of about 220 million yuan on the company's non-net profit (negative impact decreased by about 83 million yuan year on year), and some innovative subsidiaries depreciated about 80 million yuan; excluding the impact of innovative subsidiaries, the company's adjusted net profit was about 374 million yuan. In 1Q24, the company took AI and data elements as the key direction of the new strategy, and at the same time achieved changes in the organizational structure. We believe that the company's new strategy is expected to strengthen on-hand orders and actively expand the market.

The health sector has maintained rapid growth, and tens of millions of orders have continued to advance. The company's health sector maintained a high growth rate of 30% and signed nearly 20 tens of millions of projects covering the key areas of “smart hospitals”. According to IDC statistics, the company has ranked first in China's health insurance information system market share for three consecutive years. Overseas business in the field of automotive intelligence has accelerated, leading the domestic market share. In 2023, the company's overseas related business continued to accelerate, and the fixed amount added during the year was about 3 times that of the same period last year. According to market data from Geshe Auto and Zosi Auto Research, the company's T-Box market share ranked first in domestic production. Actively seize “Data Factor X” development opportunities. The company and local governments jointly set up data companies and put them into operation. The medical field is deeply involved in the management of national and provincial health insurance data. Actively deploy AI+ medical treatment, and implement a variety of applications. The company set up the Magical Science and Technology Research Institute and launched applications such as Tianyi Medical Imaging Platform 4.0, and Web-based virtual endoscopes. Among them, the Fisheye Medical Imaging Labeling Platform has already landed in dozens of medical institutions including West China Hospital.

Profit forecasting and valuation

We keep our 2024/2025 revenue/profit forecast basically unchanged, maintaining our outperforming industry rating and target price of 10.6 yuan (based on the 2024 SOTP valuation). The target price has 25% upside compared to the current stock price. The current share price corresponds to 34/24 times the 2024/2025 price-earnings ratio.

risks

The expansion of new orders fell short of expectations; innovative business subsidiaries continued to lose money.