Incident: In 2023, the company achieved operating income of 10.544 billion yuan (+11.39%), net profit to mother of 74 million yuan (+121.56%), after deducting non-net profit of 147 million yuan (+383 million yuan year over year).

The business layout shows development resilience, and the revenue scale has been growing steadily for three consecutive years. The company keeps an eye on the opportunities for industrial transformation in the digital age, implements AIGC+ data element strategic transformation, and is committed to the sustainable and high-quality development of the enterprise. Under an unfavorable market environment, the industry achieved steady revenue growth for three consecutive years, and the revenue growth rate in 2023 was +3.02 pcts year-on-year. By industry, (1) Healthcare and social security achieved revenue of 2,571 billion yuan (+29.74%). Nearly 20 10-million-level projects covering the key areas of “smart hospitals” have been signed, establishing a number of national model cases for the construction of county medical communities, and forming a replicable promotion model. It continues to maintain its leading position in the industry in fields such as the national electronic medical record system's functional application level rating, the national high-level connectivity standardization maturity assessment, and the smart hospital service rating evaluation. (2) Connected Smart Vehicles generated revenue of 3,916 billion yuan (+9.36%), maintained deep cooperation with many domestic and foreign car manufacturers, and overall shipments continued to increase. As a Tier 1 manufacturer facing the world, the overseas business continued to accelerate, and the amount of new fixed points added during the year was about 3 times that of the same period last year. (3) Smart city revenue of 1,623 billion yuan (-2.41%) has remained stable. Promote the deep integration of information technology and urban development, and drive the construction of new smart cities with “data elements” as the core. Strategic cooperation agreements covering more than 20 cities, including Nanning, Zhengzhou, and Nanjing, have been signed successively to carry out comprehensive cooperation in the fields of digital government and smart cities. (4) Enterprise connectivity and other revenue of 2,433 billion yuan (+8.64%), maintaining in-depth cooperation with many strategic customers at home and abroad. Relying on Neusoft Large Model System Engineering LLM-SE, we have built various capabilities such as knowledge engineering, reminder engineering, and quality engineering in business fields such as IMS, AMS, and cloud to help customers improve the level of digital intelligent operation and maintenance. We believe that the company has forward-looking layout advantages in the two main circuit business fields of “medical social security+smart car”. Related businesses have continued to grow steadily in recent years, demonstrating development resilience.

Profitability has improved. Net operating cash flow continued to be a positive record in 2023. The company's overall gross sales margin was 24.20%, +3.42pcts year over year, after deducting non-net profit of +383 million yuan year on year, and operating profitability increased. Expenses, sales/management/R&D expenses grew at +9.219% 6/+9.746/ +12.16%, respectively, compared with the revenue growth rate for the same period (-2.18pcts/-1.65pcts/+0.77pcts). Improve management quality and efficiency, and increase investment in cutting-edge technology research and development. Cash flow. Net cash flow from operating activities was 798 million yuan (+18.69%), setting a record of continuous net operating cash flow since 2003. Judging from R&D and innovation results, the company officially established the Neusoft Magic Science and Technology Research Institute to continue exploring AI technology innovation and application based on LLM-SE Neusoft Big Language Model System Engineering. It was the first to launch a large-scale vertical model - Tianyi, a large-scale model in the medical field, and successively launched industry applications such as the Flying Standard Medical Image Labeling Platform 4.0 and web-based virtual endoscopes, forming a “1+N” combination in the “AI+Healthcare” field. In addition, AI assistants for health insurance policies, AI claims services for commercial health insurance, AI medical records search and analysis applied to medical insurance cost review, AI auxiliary codes applied to medical insurance settlement lists, risk prediction of rare blood diseases, digital doctor assistants, etc. have gradually been implemented in several benchmark projects. During the reporting period, 153 invention patents were authorized, mainly in cutting-edge technology fields such as big data analysis, artificial intelligence, cloud computing and cloud native, blockchain, healthcare, and automotive intelligence. Among them, the number of new patents added in the field of AI and big data is about 3 times that of the same period last year. The company actively embraces cutting-edge technologies such as AIGC, digital people, cloud computing, and blockchain, and related new products, applications, and new scenarios are continuing to be implemented.

Strategic change or forge a new path for the future. Equity encourages firm confidence in enterprise development. The company held a press conference on the theme “Change to the Future” in Shanghai on March 11 to officially launch a comprehensive strategic transformation. Begin a series of strategic adjustments and initiative innovations in organizational structure, strategic management, software production, technology research and development, talent and leadership. Beginning in December of last year, it took 3 months to carry out the biggest organizational system reform in history. For example, the R&D system changed from fragmentation to centralization to achieve company-level system planning and command; upgrading the organizational structure of the enterprise, abolishing the business headquarters, and restructuring the division to achieve efficient and flat operation; simplifying management processes and restructuring the Ministry of Finance and Economics to form a “one-time completion” window; and introducing a CEO rotation system to manage cadres to compete for employment and rotation to create specialized and youthful leadership. Furthermore, according to the “2024 Stock Options Incentive Plan (Draft)” released in February this year, the company's 2024-2026 performance assessment target is that the net profit of the main business should not be less than 420 million yuan/50 million yuan/600 million yuan, respectively, +17.98%/+19.05%/+20% year-on-year, respectively. Net profit from the main business refers to net profit attributable to shareholders of listed companies, and also deducts the impact of five innovative business companies, including Neusoft Medical/Xikang/Wanghai/Rongsheng Insurance/Neusoft Reach, on net profit attributable to shareholders of listed companies, including the company's confirmed investment income and the company's long-term equity investment impairment preparations. We believe that comprehensive strategic changes may bring vitality to innovation and development, and equity incentives have further strengthened the company's confidence in medium- to long-term development.

Investment advice

We believe that the company's business layout shows development resilience, and the revenue scale has been growing steadily for three consecutive years. Initiate comprehensive strategic changes or bring vitality to innovation and development, and equity incentives have further strengthened the company's confidence in medium- to long-term development. The company's revenue for 2024-2026 is estimated to be 11.840 billion yuan, 13.504 billion yuan, and 15.644 billion yuan, respectively; net profit to mother is 247 million yuan, 297 million yuan, and 442 million yuan respectively. Corresponding to the current PE is 39X /33x /22X, respectively, maintaining a “buy” rating.

Risk warning

Downstream demand falls short of expectations; technology iteration accelerates; market competition intensifies