Incident: Tianrongxin released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved operating income of 3.124 billion yuan, a year-on-year decrease of 11.81%; net profit to mother was 371 million yuan, which turned into a year-on-year loss. In the first quarter of 2024, the company achieved operating income of 422 million yuan, a year-on-year decrease of 9.93%; realized net profit to mother - 89 million yuan, a year-on-year loss reduction of 2.12%.

Q4 Pressure dragged down full-year results. In Q4 2023, the company's revenue decreased by 603 million yuan year-on-year. Without considering the impact of impairment of goodwill, operating net profit decreased by 305 million yuan. Furthermore, the company's new orders and revenue in 2023 fell short of expectations. Considering the recovery in macroeconomic and industry demand, the company calculated a goodwill impairment of 443 million yuan.

Improving quality and efficiency has achieved certain results, and gross margin is stable. In 2023, the company's R&D expenses were 768 million yuan, a year-on-year decrease of 6.35%. In terms of management expenses, the company strengthened and improved management efficiency. Stock payment fees were reduced during the year, and overall management expenses were 217 million yuan, a year-on-year decrease of 32.58%. The company's gross margin has basically stabilized at around 60% in the past three years. The company's overall gross margin in 2023 was 60.19%, up 0.47pct year-on-year.

Cash flow from operating activities is improving. In 2023, the company stepped up its efforts to repay accounts receivable, and customer payments significantly exceeded operating income. Net cash flow from operating activities increased by $788 million year over year, of which cash received from sales increased by $588 million, an increase of 19.39%. In addition, the company strengthened procurement control and supplier management in terms of procurement payments, strengthened collaboration with suppliers, and reduced procurement payment cash by 236 million yuan, a decrease of 16.46% over the previous year.

Xinchuang has seen impressive growth. In 2023, the company's revenue in government and public institutions was 1,427 billion yuan, up 8.48% year on year, while revenue from state-owned enterprises decreased 26.30% year on year. Under these circumstances, the company's Xinchuang business achieved a 33.01% year-on-year increase in revenue. As one of the earliest cybersecurity companies in China to invest in the Xinchuang industry, the company is leading the industry in the variety and quantity of products shortlisted through continuous technological innovation and R&D investment, and the company's Xinchuang business has certain advantages.

Investment advice: As a leading firewall company, the company has its own core competitiveness and leading product market position. The company's 2023 results were under pressure due to single-quarter revenue orders and goodwill deductions. Through precise fee control, repayment is strengthened, gross margin is stable, and cash flow from operating activities is improving. We are optimistic that the company will benefit from the development opportunities of Xinchuang in the industry, and cybersecurity Xinchuang products are expected to have good growth opportunities. It is predicted that in 2024-2026, the company will achieve revenue of 3,535 billion yuan, 4.101 billion yuan, 4.973 billion yuan; net profit to mother of 260 million yuan, 346 million yuan, 416 million yuan; EPS 0.22, 0.29, 0.35, PE 28X, 21X, 17X, and maintain the “gain” rating.

Risk warning: Policy implementation falls short of expectations; market competition intensifies; risk of seasonal changes in revenue; technology transformation falls short of expectations.