Event: The company recently released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, it achieved revenue of 3,073 billion yuan, YoY -10.62%; net profit to mother of 349 million yuan, YoY +13.74%; gross profit margin of 42.33%, +5.65pct year on year. 2024Q1 achieved revenue of 128 million yuan, YoY -68.94%; net profit to mother of 194 million yuan, YoY -423.69%; gross profit margin of 52.27%, -0.12pct year on year.

Comment: The product structure continues to be optimized, and the first quarter results were mainly affected by seasonal and government budget tightening. By business, the company's cryptographic business revenue in 2023 was 1,475 billion yuan, YoY +10.45%, gross profit margin up 2.57 pct; cybersecurity business revenue was 1.47 billion yuan, YoY -21.96%, gross profit margin 27.90%, up 3.90 pct year on year; data security business revenue was 128 million yuan, YoY -41.54%, gross profit margin of 39.92%, up 1.89pct year on year. The company's high-margin cryptographic business maintained steady growth, accounting for 47.99% of the company's business. The product structure was continuously optimized, and profitability continued to improve. On the cost side, the company's sales/management/R&D expenses in 2023 were 3.57/1.79/423 million, respectively, YoY +6.76%/-0.69%/+12.09%, respectively. The decline in 2024Q1's performance was mainly due to seasonal fluctuations and the tightening of the government budget.

Remarkable results have been achieved in emerging cutting-edge business fields such as satellites and quantum. In the satellite field, the company is developing related products and services for China Satellite Network Group Co., Ltd., while strengthening cooperation with Blue Rocket and other enterprises to jointly carry out pilot demonstrations with satellite Internet users in many regions. On October 24, the company won the bid for the China Satellite Network Group Co., Ltd. project with an amount of 20134,900 yuan. In the quantum field, the company promotes research, standard setting, and product implementation of cutting-edge technologies such as post-quantum cryptography and privacy computing, breaking through chip post-quantum cryptography and fully homomorphic cryptography implementation technology. With the accelerated construction of the satellite and quantum industry, the company's related business is expected to grow rapidly and build a new growth curve.

The product matrix continues to improve, and top-level cryptographic capabilities continue to improve. During the reporting period, the company's self-developed 40Gbps high-performance security SoC chip passed the commercial secret product qualification certification; the first AEC-Q100 vehicle-grade reliability test and testing Grade3 certified cryptographic chip was released, with a cumulative total of about 300,000 units sold in connected car terminals; and the Level 3 financial data encryption machine obtained the commercial secret qualification and completed the release.

Profit forecast: Telecom Network Security is a leading enterprise in China's cryptographic and network security industry. It is optimistic that the company's cryptographic business will continue to grow and achieve rapid expansion in new business fields such as satellites. It is expected to achieve revenue of 37.01/44.72/5.416 billion yuan in 2024-2026, and net profit of 449/5.45/679 million yuan, corresponding to EPS of 0.52/0.64/0.80 yuan. This is the first coverage, giving it a “buy” rating.

Risk warning: Competition in the industry is intensifying, and the progress of new business development falls short of expectations.