Introduction to this report:

The company's 2024Q1-Q3 cost side was significantly optimized, and Q3 gross margin increased markedly. As the company maintains gross margin level and cost control, and the three businesses of Xinchuang, data security, and PQC advance collaboratively, the performance is expected to exceed expectations.

Key points of investment:

The increase rating was maintained, and the target price was raised to $23.06 (+2.62). Due to the slow progress of the company's business in 2024, we lowered our profit forecast. The company's net profit for 2024-2026 is 0.63 (-0.39) /0.96 (-0.55) /0.124 billion yuan, respectively, and EPS 0.27 (-0.17)/0.40 (-0.25) /0.52 yuan, respectively. By selecting PE valuation, we gave the company 57.0 times PE in 2025, increasing the target price to 23.06 yuan.

Results declined in the first three quarters, and profit improved in Q3. The company achieved revenue of 0.333 billion yuan in the first three quarters of 2024, up 0.40% year on year, and achieved net profit to mother of -0.0038 million yuan, a slight increase in losses compared to last year; in the third quarter of 2024, the company achieved revenue of 0.139 billion yuan, -17.24% year over year, and net profit to mother 0.012 billion yuan, -8.00% year over year.

Q3 Gross margin increased dramatically, and the cost control effect in the first three quarters was remarkable. 2024Q3's gross margin was 53.96%, a sharp increase of 18.17pct year on year; the company's expense ratio for the first three quarters was 58.68%, down 4.90 pct year on year. The cost control effect was remarkable. Sales, management, and R&D expenses fell 2.03, 3.42, and 0.39 pct year on year, respectively. As the company continues to reduce costs and increase efficiency in the fourth quarter, the profit side is expected to continue to improve.

Forward-looking layout against quantum cryptography (PQC), waiting for the standard to be released. In 2021, Ger Software launched a strategic deployment of anti-quantum cryptography. In terms of anti-quantum migration work for all cryptographic products, the company developed anti-quantum cryptographic basic products such as cryptographic machines, signature verification servers, key management systems, integrated security gateways, and PKI/CA based on anti-quantum cryptography algorithms. Currently, Ger Software participated in the formulation of China's national standards for anti-quantum cryptography. When the US National Institute of Standards and Technology (NIST) officially released the world's first anti-quantum cryptographic algorithm standard, the company had already initially formed candidates based on international standard algorithms and national secret standards The algorithm is an anti-quantum solution for identity security, data security, network security, and intelligent IoT, and is piloting anti-quantum cryptography applications in many banks to help protect China's fintech security. Until anti-quantum cryptography standards are released, the company's PQC business is expected to rapidly accelerate performance growth beyond expectations.

Risk warning: The risk of business development falling short of expectations, and industry competition exacerbates risks.