Event Overview:

1) The company recently released its three-quarter report for 2024. In the first three quarters, it achieved revenue of 0.255 billion yuan, an increase of 7.81% year on year, and achieved revenue of 0.085 billion yuan in 24Q3, a year-on-year decrease of 35.66%.

Net profit to mother was 0.014 billion yuan in the first three quarters, a year-on-year decrease of 64.33%. The company's 24Q3 revenue and profit are under pressure, mainly due to delays in some of the company's projects and continued investment on the expense side. We believe that with the improvement of the external macro environment and the expansion of the company's internal outreach, future performance improvements are still worth looking forward to.

2) The company recently issued the “Notice on Asset Acquisition”. It plans to use 0.172 billion yuan of its own capital and 0.09 billion yuan of overfunded capital to acquire 81.81% of Jiangnan Tian'an's shares. The counterparty promised that during the 2024-2026 business cycle, the target company will increase net profit year by year and ensure that the three-year cumulative net profit is not less than 315% of the net profit due to mother (20.3296 million yuan) in 2023.

2024Q3 performance is under pressure, and the external environment has delayed some projects

On the revenue side, the company's 24Q3 revenue fell 35.66% year on year, mainly due to macroeconomic and other factors. The progress of some of the company's projects fell short of expectations, and delays in project delivery and acceptance occurred to varying degrees, leading to a decline in the company's current operating income. We believe that in the future, along with the gradual improvement of the external macro environment, the company's revenue side is expected to return to growth.

On the profit side, the company's sales/management/ R&D expense ratios for the first three quarters were 34.41%/13.31%/31.89%, up 8.28/2.36pct year-on-year, mainly due to a slowdown in revenue growth, but investment in R&D and sales continued, leading to an increase in cost ratios, which affected profit performance. We believe it is a normal choice for the company to maintain a certain level of R&D and market investment as a technology company, and the cost ratio is expected to decline after the revenue side resumes growth.

Endogenous development of anti-quantum cryptography products, epitaxial merger and acquisition of Jiangnan Tianan integrates endogenous R&D. On September 13, 2024, Sanwei Xinan held the “Exploring a New Future of Infinite Security” Cryptographic Innovation Conference 2024 in Beijing. At the conference, the company released a new generation of anti-quantum cryptography products, the “White Paper on Anti-Quantum Cryptography Technology and Applications (2024)”, and various innovative new cryptographic products. The company released a new generation of anti-quantum cryptography products, covering the entire industry chain of anti-quantum cryptographic chips, anti-quantum cryptographic boards, quantum-resistant UKEY, anti-quantum cryptographic machines, anti-quantum gateways, anti-quantum digital certificate authentication systems, and anti-quantum key management systems, and has built a new generation of anti-quantum cryptographic infrastructure. We believe quantum computers are moving towards commercial use, bringing new challenges and opportunities to the cryptographic industry. The company's forward-looking layout of anti-quantum cryptography products is expected to seize the first-mover advantage in the future.

In terms of epitaxial mergers and acquisitions, the company recently announced that it plans to use 0.172 billion yuan of its own capital and 0.09 billion yuan of overfunded capital to acquire 81.81% of Jiangnan Tianan's shares. Established in 2005, Jiangnan Cheonan is a well-known comprehensive service provider for cryptographic technology and information security in China. Based on independent innovation, the company developed the first domestic cryptographic machine to support cloud computing applications, and is a major participant in formulating standards for cloud server cryptographic machines in China. The company continues to provide cloud cryptographic products and services to major cloud service providers, leading the domestic cloud cryptography market, and provides overall commercial cryptographic products, technology and information security solutions to key industries and enterprise customers such as energy, finance, government, telecommunications, the Internet, and cloud platforms. In 2023, Jiangnan Cheonan achieved operating income of 0.155 billion yuan and a net profit of 0.02 billion yuan to mother, with a certain scale. This merger and acquisition is also the second acquisition and integration in the commercial cryptographic industry since the company acquired Jiangnan Keyou. It helps the company to expand and collaborate in products and markets, and further strengthen the company's position and share in the commercial secret market.

Investment advice:

The company is a manufacturer that has achieved vertical integration in the commercial secret industry, and is scarce. The company has strong R&D capabilities, starting in the high-barrier board/machine field in the commercial secret industry, bringing cost and performance advantages to self-developed chips and expanding the system downward to open up room for growth. In addition, the company's high-performance self-developed chips have opened up the IoT market, built a second growth curve, and there is broad room for growth. We expect the company's revenue for 2024-2026 to be 0.499/0.59/0.69 billion yuan, and net profit to mother of 0.085/0.116/0.139 billion, respectively. Maintaining the buy-A investment rating, the 6-month target price is 40.70 yuan, which is equivalent to a dynamic price-earnings ratio of 40 times in 2025.

Risk warning:

Policy implementation fell short of expectations, downstream prosperity declined, industry competition intensified, and the implementation of cryptographic chips fell short of expectations.