2023&1Q24 results are in line with market expectations

The company announced its 2023 and 1Q24 results: revenue for 2023 increased 9.6% year on year to 2.17 billion yuan; net loss to mother increased year on year to 360 million yuan; net loss after deduction increased to 390 million yuan year on year, in line with market expectations; in a single quarter, 4Q23 revenue was 960 million yuan, up 2.4% year on year, and net profit to mother was 180 million yuan, down 13.6% year on year. 1Q24 revenue was 280 million yuan, down 16.5% year on year; net loss to mother was basically flat at about 200 million yuan year on year, which is basically in line with market expectations.

Development trends

Consolidate competitive barriers and embrace AI opportunities. At the product level, the company's revenue for basic network information security products/security platforms/security services/third-party hardware products in 2023 was -2.3%/+1.3%/+24.4%/+14.0% to 4.6/7.8/8.3/60 billion yuan, respectively. At the industry level, the revenue of central state-owned enterprises/healthcare increased by more than 150%/30% year on year; the industry army strategy achieved results, and operators/telecommunications/Internet communication/transportation/electricity revenue increased by more than 30%/70%/40%/20% year over year. At the gross margin level, the company's overall gross margin was 2.4ppt to 61.8% year on year in 2023, mainly due to increased competition and increased service share, we expect gross margin to rise in 24 years in the context of cost reduction and efficiency; among them, the gross margin of security basic products increased 1.2ppt to 76.6% year on year, and the gross margin of security platforms/security services/third-party hardware decreased 1.5/1.6/14.9ppt to 70.4%/49.6%/1.3% year on year. In 2023, the company maintained rapid growth in new strategic directions such as MSS, Xinchuang Security, and Password Security. MSS revenue increased by more than 300% year on year, Xinchuang security products increased by more than 100% year on year, shipments and number of customers of commercial cryptographic machines and system products all increased by more than 100% year on year; data security contract amount increased nearly 40% over the previous year; actively embraced AI opportunities and launched the “Everbrain” security vertical model, and the third curve grew steadily.

Continue to promote cost reduction and efficiency. In 2023, the company actively promoted cost reduction and efficiency. The total three fees increased 2.3% year on year to 1.73 billion yuan, and the sales/development/management expenses ratio decreased by 1.2/3.3/1.2ppt to 41.9%/29.3%/8.5% year on year, respectively. Total per capita income in 2023 fell 18.7% year on year to 560,000 yuan, and the net loss rate to mother increased by 3.8ppt to 16.6% year over year. Mainly due to the company's large annual personnel base, rigid labor costs are still on the rise, while supporting major events such as the Hangzhou Asian Games brought in large incidental investments. The total of the three fees for 1Q24 fell 19.8% year over year to 340 million yuan. There are obvious signs of improvement on the cost side. We think the profit in '24 is expected to recover.

Profit forecasting and valuation

Maintain an outperforming industry rating. Taking into account the uncertainty of revenue recognition, 2024 revenue was reduced 19% to $2.42 billion, and 2024 net profit was reduced 78% to $21 million. Introduced 2025 revenue of 2.82 billion yuan and net profit of 99 million yuan. Considering the decline in the valuation center of the industry due to fluctuations in the macro environment, we lowered our target price by 54% to 80 yuan (based on 3x 2024e P/S), which currently corresponds to the stock price of 1.9/1.6x2024/2025e P/S, which has 40% room to rise compared to the current stock price.

risks

Downstream customer demand falls short of expectations; new product expansion falls short of expectations.