Incident: Recently, the company released the 2024 three-quarter report. According to the company's announcement, revenue for the first three quarters was 4.634 billion yuan, -3.63% year-on-year, and net profit to mother was -0.58 billion yuan, an increase in year-on-year losses. Q3 revenue in a single quarter was 1.926 billion yuan, +2.77% year over year, and net profit to mother 0.012 billion yuan, +54.76% year over year. The performance was in line with expectations.

Downstream demand is recovering, and fiscal policy may be an important starting point. According to the company's announcement, the company's new order situation during the 24Q3 reporting period was not ideal. The main reason is that the domestic macroeconomic environment is still recovering slowly, downstream customers are still cautious about IT investment, and investment in the cybersecurity sector is expected to decrease or be delayed. According to the company's announcement, the government side and enterprise side are the company's core downstream, and 24H1 both account for about 90%. According to the Chinese Government Network, “On the basis of speeding up implementation of established policies, the Ministry of Finance will launch a package of targeted incremental policy measures in the near future, focusing on steady growth, expanding domestic demand, and mitigating risks.” With the introduction of a package of fiscal incremental policies, if later transmitted to the enterprise side, the company's demand is expected to usher in a double beta recovery.

Gross margin is under phased pressure, and cost-side prices are expected to decline. According to the company's announcement, the Q3 gross profit margin for the single quarter was 59.57%, -6.55pct year on year, mainly due to rising hardware procurement costs and fierce market competition. According to the breadth of the semiconductor industry, the recovery of the storage industry in the first half of the year was mainly driven by the artificial intelligence boom and the reduction of production by storage vendors on both sides of supply and demand. However, production capacity recovered rapidly, and the recovery in consumer electronics fell short of expectations. Since 24Q3, the prices of storage products such as solid-state drives have shown a downward trend.

Strategic stocking responds to upstream fluctuations, and cash flow conditions improve. According to the company's announcement, as of the end of the third quarter, the company's inventory was 0.511 billion yuan, +66.26% year over year, mainly due to the company's strategic preparation to cope with the rise in raw materials; operating cash flow for the third quarter was 0.246 billion yuan, +25.52% year over year, and the company's capital return was good.

New safety products will be released in the fall. According to the company's official website: 1) Secure GPT4.0 - Data Security Platform, automatically completes the classification and classification of static data in databases and flowing data such as APIs, greatly improving the efficiency of classification and classification. Compared with traditional small models, the accuracy rate of static classification has been increased from 60% to 90%, and the marking efficiency has been increased 40 times; 2) The latest distributed storage EDS has a multi-node fault recovery function in seconds, which is much faster than the 30 to 45 seconds required by other vendors under a single fault, and also has an intelligent AI anti-ransomware function with low performance consumption to protect data storage security in all aspects.

Investment analysis opinion: Maintain a “buy” rating. The company adjusted its marketing and sales strategy and organizational structure in 24Q1, promoted system upgrades around new channels according to strategic product characteristics, and increased resource investment in leading industry customers and international markets. The repair trend is clear in Q3, and it is expected that the effects of the adjustments will continue to show in Q4. Maintaining the profit forecast, the 24-26 revenue forecast is 7.733/8.172/8.64 billion yuan, and the net profit forecast to mother is 0.254/0.354/0.448 billion yuan. It is expected that incremental fiscal policies will stimulate a recovery in demand, and the company is expected to usher in a dual government+enterprise beta recovery and maintain a “buy” rating.

Risk warning: slow recovery of security services; increased competition between security and cloud computing services; slow breakthroughs by leading customers, etc.