Demand remained under pressure in '23, and losses widened. The company released its 2023 annual report and achieved full-year revenue of 2.170 billion yuan (+9.6%), net profit to mother of 360 million yuan (-41.90%), and net profit of non-return to mother of 388 million yuan (-29.86%). Looking at Q4 alone, the company's revenue was 963 million yuan (+2.38%), net profit attributable to mother was 176 million yuan (-13.60%), and net profit not attributable to mother was 168 million yuan (-6.66%). Although the company has been actively reducing costs and increasing efficiency in '23, the annual personnel base is large and costs are rigid; at the same time, it has invested heavily in supporting the Hangzhou Asian Games, the Chengdu Universiade, etc., which has led to an increase in losses.

The base for the same period last year was high, and revenue in the first quarter declined year on year, but expenses were controlled significantly. In 24Q1, the company achieved revenue of 281 million yuan (-16.47%), net profit attributable to mother of 200 million yuan (-5.75%), and net profit of non-attributable net profit of 204 million yuan (-4.99%). There were reasons for order and revenue delays in the first quarter of '23, which led to a large base. Sales, management, and R&D expenses dropped significantly in 24Q1. The total cost of three expenses decreased by 19.81%, the biggest drop in five years.

Security services have maintained a high growth rate, and the central state-owned enterprise industry has performed well. By product, revenue from basic security products was 455 million yuan (-2.29%), revenue from security platforms was 779 million yuan (+1.31%), revenue from security services was 827 million yuan (+24.41%), and revenue from third-party products was 58 million yuan (+14.20%). The company maintained rapid growth in new strategic directions such as MSS, Xinchuang Security, and Password Security. At the industry level, the revenue of the company's central and state-owned enterprises increased by more than 150%; the medical industry grew by more than 30%; operator revenue increased by more than 30%, of which the telecommunications sector increased by more than 70%; the Internet communication and transportation industries grew by more than 40%; the power industry grew by more than 20%; and the company's military revenue growth rate also significantly exceeded the company's overall growth rate.

Data elements open up new growth points, and the “permanent brain” model will gradually be applied. The digital certificate for data compliance circulation created by the company can truly record the entire compliance transaction process of both parties to the transaction, generate a digital certificate similar to a “data transaction invoice” for each transaction, and can achieve the function of tracking the transaction process and judging compliance. Currently, the platform is an important part of China's Digital Valley's “Three Numbers One Chain” data infrastructure, and is expected to explore new business models. The company's Heng Brain · Security Potential Model has been effective in the Asian Games. At the same time, it has also successively launched “Everbrain+ Secure Operation” and “Everbrain+ Data Security” product solutions. Large model applications are valuable in the field of security, such as improving the efficiency of security operations by more than 75% and improving advanced threat detection capabilities by more than 70%. In particular, the company's security services account for a relatively high proportion, and Hengbrain is expected to greatly improve human efficiency and bring value to both A and B parties.

Risk warning: Macroeconomics affects IT spending; industry competition intensifies; new business expansion falls short of expectations.

Investment advice: Maintain a “buy” rating. Due to the impact of the pace of economic recovery, we lowered our profits. The estimated net profit for 2024-2026 is 0.15/1.01/174 million yuan (the original forecast was 293/492 million yuan for 24-25), corresponding to the current PE of 297/45/26 times. Considering the company's efforts to improve efficiency and reduce costs, the application of AI and data elements can be expected to maintain a “buy” rating.