Key points of investment

Incident: On April 30, 2024, Zhenyou Technology released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 884 million yuan, an increase of 66.10% over the previous year, and achieved net profit of -87 million yuan; in 2024Q1, the company achieved operating income of 180 million yuan, an increase of 32.64% over the previous year, and achieved net profit of 0.07 billion yuan, an increase of 46.84% over the previous year.

Revenue continued to grow significantly in 2023, and net profit loss narrowed compared to the same period last year. In 2023, the company's revenue was 884 million yuan, up 66.10% year on year, of which main business revenue was 872 million yuan, an increase of 65.17% over the same period last year. Among them, revenue from network and access systems and technology and maintenance services all increased by more than 160%. The increase in total revenue is mainly due to the company's continued exploration of domestic and foreign markets and the gradual resumption of overseas business. At the same time, with the launch and acceleration of the satellite Internet process, the company's domestic and foreign bid projects and orders have increased significantly, and market competitiveness has continued to improve. During the reporting period, the company achieved net profit of -87 million yuan, of which non-net profit deducted from mother was -93 million yuan. The loss was narrower than in the same period last year. The main reason was that the company actively developed the market, steadily promoted the delivery of execution projects, and achieved a significant increase in operating income. At the same time, the company focused on cost control and fee reduction, and strengthened control over sales expenses, management expenses, and R&D expenses. The increase in expenses during the period was small, so net profit due to mother and non-net profit deducted from mother decreased significantly compared to the previous year. In addition, indicators such as operating cash flow and earnings per share also improved significantly compared to the same period, mainly due to a sharp increase in cash received from sales of goods and provision of labor services and an improvement in net profit.

Public network+private network communication is fully effective, and gross margins of core networks, optical networks and access systems have improved markedly. The company's main products cover all communication network levels in the core layer, aggregation layer and access layer of public network communication and private network communication. The products and solutions include core networks, access networks, optical networks, command and scheduling, and smart applications. In 2023, the company's digital intelligence network and smart emergency systems increased 25.98% year on year. The main reason was that the company actively expanded the digital intelligence network and smart emergency system business, and the amount of delivery and inspection projects increased steadily during the period; optical networks and access systems increased 169.38% over 2022. The main reason was that the company actively expanded overseas markets, including Asia Pacific, North America, Europe and Africa. The gross margin of optical networks and access systems increased 22.58 percentage points this year compared to 2022. The main reason was that the company increased investment in R&D and continuously optimized the product structure. Due to the high added value of products; technology and maintenance services increased by 178.67% compared to 2022, mainly due to the company's growth in optical communication's technology maintenance service business; in 2023, the gross margin of the company's core network increased by 5.16 percentage points over the previous year, and the gross profit margin of overseas revenue increased by 4.13 percentage points, mainly due to the company's continuous investment in R&D, continuous optimization of the product structure, and the company's continuous improvement of overseas market layout, enhancing the competitiveness of the company's products in the global market. Therefore, the overseas gross margin of products such as core network systems, optical networks and access systems all increased.

Continue to increase investment in core technology research and development to consolidate the competitive advantage of technical barriers. During the reporting period, the company had 754 R&D technicians, the proportion of R&D personnel was 59.51%, and R&D investment was 210 million yuan, an increase of 5.92% over the same period last year. In 2023, the company authorized 116 invention patents, 4 utility model patents, 4 design patents, and 49 software copyrights. By the end of 2023, the company had applied for a total of 733 patents and 448 software copyrights. During the reporting period, the company actively developed new products, mainly covering the fields of core networks, optical networks and access, digital intelligence networks and smart emergency response. Based on existing core technology, it launched and commercialized integrated signaling solutions that meet the latest 3GPP specifications, continued to improve the features of 10G PON OLT series products and initiated preliminary research on 50G PON OLT products, participated in the formulation of standards for MOTN, white box OLT, 5G private networks, 5G user surface (UPF N4 decoupling) and other related products organized by the Carrier Research Institute to maintain advanced technology sex.

Domestic and foreign markets have blossomed, and a new high-cost satellite communication order of 112 million US dollars has been signed. The company actively implements diversified product line development strategies in domestic and foreign markets and the satellite Internet field, highlights its differentiated competitive advantages, and keeps up with the rapid development of the communications industry. In the domestic market and public network sector, it cooperated closely with domestic telecom operators to win bids for a number of key core network projects in the 5G field; in the F5G field, a series of provincial operator XGPON equipment projects were successively won; in the satellite Internet field, the company won bids for several satellite Internet core network projects during the reporting period, and continued to track and develop the mobile phone direct connection satellite business. In overseas markets, the company obtained India Telecom MNP number carrying capacity expansion orders and IP-MPLS router orders in the private network field, India's TATA IMS expansion order, signed an all-IP mobile core network project with Bangladeshi mobile operator Banglalink, and delivered mobile operator Telekom Malaysia's UCaaS project in the Malaysian market; it has also successively won bids for DRA signaling networks, access networks, and optical fiber networks in the Middle East and Africa markets; 2024 In March of this year, the company issued an announcement stating that it had recently received a contract for the purchase and sale of a satellite communication project in a certain country signed by the company as a participant in Beijing. The total contract price was 112 million US dollars (excluding tax). If the contract is successfully implemented, it will have a positive impact on the company's future performance.

Investment advice: The company is a leading domestic supplier of communication system equipment and technical solutions, and has comprehensive advantages in the field of core networks, centralized local terminals, and command and dispatch. Considering the company's domestic and overseas business breakthroughs and the rapid contribution of new curve businesses such as satellite communications, in order to consolidate the company's continuous R&D investment and continue to increase project expansion efforts, we adjusted the profit forecast. The company's revenue for 2024-2026 is 1,175/14.86/18.15 billion yuan, up 32.9% /26.5% /22.1% year on year, and net profit to mother is 0.62/1.09/169 million yuan respectively, up 171.6%/76.2%/54.3% year on year, corresponding EPS 0.32/0.56/0.87 yuan, PE was 58.0/32.9/21.3, maintaining the “gain” rating.

Risk warning: Liquidity shortage risk, exchange rate fluctuation risk, satellite internet construction falling short of expectations, overseas business expansion falling short of expectations, new product development falling short of expectations.