Incident: The company released its 2023 annual report, achieving full year revenue of $3.124 billion (-11.81%), net profit to mother of $371 million (-281.09%), and deducted non-net profit of $417 million (-371.32%), of which Q4 achieved revenue of $1,476 million (-29.01%), net profit to mother of $123 million (-119.70%), and deducted non-net profit of $153 million (-125.07%). In addition, the company released its 2024Q1 quarterly report. During the reporting period, it achieved revenue of 422 million yuan (-9.93%), net profit to mother of -89 million yuan (+2.12%), and deducted non-net profit of -95 million yuan (+2.05%).

Emerging businesses are growing well. In 2023, the company's basic safety product revenue was 2.559 billion yuan (YoY -11.30%), gross profit margin 58.82% (YoY -0.49pct), basic security service revenue 403 million yuan (YoY -8.63%), and gross profit margin 67.29% (YoY +9.76pct). In the new business direction, in 2023, Xinchuang's business revenue increased 33.01% year over year, data security business revenue increased 6.87% year over year, and cloud computing revenue increased 12.17% year over year, indicating that market demand in this field is still solid. Looking downstream, revenue from government customers and commercial customers recovered, achieving revenue of 1,427 billion yuan, an increase of 8.48% year on year, but revenue from state-owned enterprise customers and commercial and other customers was 894 million yuan and 793 million yuan, respectively, down 26.30% and 21.5% year on year.

Expense rate increases and goodwill impairment during the period affected overall performance. The company accrued goodwill impairment losses of 443 million yuan in 2023, which had a significant impact on performance. If goodwill impairment factors are excluded, net profit attributable to mother during the reporting period could reach 72 million yuan. On the cost side, the cost rate for the period was 61.02% (+5.89pct). Among them, the sales expense ratio was 29.41%, up 6.49 pct year on year, the management cost ratio was 6.95%, down 2.14 pct year on year, and the R&D expense ratio was 24.60%, up 1.44 pct year on year.

The company values new products and AI technology. In 2023, the company launched the “Tianwen Big Model”, which can effectively monitor and warn against complex cyber attacks and significantly improve security protection capabilities. At the same time, the company innovated and upgraded cloud security, hyperintegration and other core product lines, introduced software-defined security technology and domestic hardware platforms, enhanced product performance and security, released Taihang Cloud 4.0, privacy computing platforms, etc., and continued to improve the application of new industry scenarios.

According to the company's 23 annual report and 24Q1 quarterly report, the revenue growth rate was adjusted downwards and the gross margin and expense ratio levels were adjusted. We predicted that the company's EPS for 2024-2026 would be 0.20/0.28/0.38 yuan respectively (the original 24-25 EPS was 0.48/0.68 yuan). Based on the comparable company's PE level, we gave the company 44 times PE in 24 years, and the corresponding target price was 8.80 yuan, maintaining the purchase rating.

Risk warning

Demand for cybersecurity falls short of expectations; competition in the cybersecurity market intensifies; risk of impairment of goodwill.