Incident Overview

The company recently released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 1,035 million yuan, an increase of 3.36% over the previous year, and achieved net profit of 198 million yuan, an increase of 1.89% over the previous year. In the first quarter of 2024, the company achieved operating income of 1,035 billion yuan, a year-on-year decrease of 14.66%, and realized net profit to mother of 489 million yuan, a year-on-year decrease of 18.64%. The company's 2024Q1 performance is under relative pressure, and we believe that the inflection point of downstream demand will have to wait.

Revenue awaits recovery in demand, and operating cash flow remains good

On the revenue side, according to the annual report, the recovery of the domestic macroeconomic environment was weak in 2023. Downstream customer investment was still cautious, procurement processes lengthened, and demand recovery was slow. Coupled with the impact of multiple factors such as intense market competition and the company's lack of timely response to changes in the external environment, the company achieved a slight increase in operating income.

By product line, the company's cybersecurity business revenue was 3.892 billion yuan, down 0.14% year on year; cloud computing and IT infrastructure business revenue was 3,090 billion yuan, up 8.07% year on year; basic network and IoT business revenue was 680 million yuan, up 3.70% year on year. Looking at business highlights, according to the annual report, customers in the domestic market, including energy, transportation, etc., maintained a high order growth rate, and the revenue growth rate of corporate customers reached 19.73%. At the same time, the revenue scale of overseas markets also continued to grow at a high rate, with a revenue growth rate of 47.98%.

On the gross margin and expense side, according to the annual report, the company's comprehensive gross margin in 2023 was 65.13%, an increase of 1.3 pct over 2022. The growth rate of the company's three expenses (R&D, sales, management expenses) in 2023 was 5.77%, and continued to be controlled within a reasonable range. Among them, due to increased business activities, more marketing and marketing expenses, the growth rate of sales expenses was higher, at 12.07%. The company has generally maintained its overall strategy of reducing costs and increasing efficiency.

In terms of cash flow, the company's net operating cash inflow in 2023 was 9.306 billion yuan, up 7.34% year on year; of these, cash received from selling goods and providing services was 8.730 billion yuan, up 7.40% year on year. Against the backdrop of pressure from the external environment, the company still achieved good cash flow performance, reflecting the company's steady management development philosophy.

The entire product line incorporates AI capabilities to upgrade product capabilities

In terms of cybersecurity products, according to the annual report, the company was the first in China to launch a self-developed large-scale model, Security GPT (Security GPT), in 2023. Security GPT is a vertical model of the new security paradigm of “open platform+leading components+cloud services” built by the company using high-quality data, computing power, and talent advantages accumulated over many years in AI research and development to gather the company's security capabilities. At the new product launch in the spring of 2024, the company continued to release the upgraded version of security GPT 3.0, and the anti-targeted phishing attack detection rate exceeded 91.4%, far surpassing traditional solutions.

In terms of hyperconverged HCI products, according to the annual report, the company incorporates AI capabilities through self-developed innovative technology to achieve active monitoring, analysis and deployment, greatly improving the ability to accurately predict and locate various faults; in terms of storage products, the company's storage EDS released the 501 high-performance version, which helps users achieve both storage capacity expansion and performance through innovation in self-developed technology.

Storage EDS provides users with a high-performance operating experience in high-precision scenarios such as AI training, chip design, surveying and mapping operations, and video production.

Investment advice:

As a domestic provider of enterprise-level ICT solutions, we are convinced that it has the two major business segments of network security and cloud computing. It is expected to achieve deep integration of security and cloud, and achieve new business growth under the strategy of cloud and service. We expect the company to achieve operating income of 83.20/91.32/10.116 billion yuan in 2024/25/26, achieve net profit of 2.77/4.06/531 million yuan, maintain a buy-A investment rating, and give a 6-month target price of 79.24 yuan, which is equivalent to 4 times the dynamic market sales rate of 2024.

Risk warning: downstream customer demand falls short of expectations; technology development falls short of expectations.