Main points of investment

Network security has become one of the four focus plates of the Dianke Group, and Westco is expected to become a resource integration platform: as network security rises to a national strategy, China Telecom focuses on building a network security sub-group, China Network Security, according to the needs of the overall national security strategy. At the 2021 working meeting of China Telecom, the chairman of the Group proposed to focus on electronic equipment, network information system, industrial foundation and network security during the 14th five-year Plan. Visteon, as the only listed company of China's Netan, has previously acquired 30 Jiawei, 30 Ruitong and 30 Shengan, pointing out the way for the company's future strategic integration. Under the plan of increasing the proportion of asset securitization and focusing on building the network security plate of the Dianke Group, it is expected that Guestone will become the group's resource integration platform in the network security field, constantly expanding and improving the whole industry chain.

Equity incentive is expected to stimulate vitality and move towards a new chapter of development: the company plans to award 7.81 million shares to a total of 300 executives, core technicians and key employees at a price of 11.42 yuan per share. Internally, through the long-term incentive mechanism, bind the company's core management and technical team; release positive signals to reshape the company's image in the industry and capital markets. By improving the modern enterprise system with Chinese characteristics and forming a scientific and effective corporate governance mechanism, the continuous management improvement under the new mechanism is worth looking forward to.

Policy, emerging technology and other multi-point demand resonance, the industry will usher in the opportunity of localization and generalization:

With the formal implementation of equal guarantee 2.0 and "password Law", the demand for rigid password compliance is expected to break out. In the short term, password law will be the first to be applied in the party and government and key information infrastructure industries with strong compliance demand, and the encryption industry will usher in the opportunity of localization; in the long run, with the rapid development of cloud computing, big data, Internet of things and other emerging fields, new technologies, new models (active defense), new architecture (zero trust) will promote the growth of password ubiquitous applications.

With the goal of the "new four modernizations" strategy, it is expected to move from a password core enterprise to a comprehensive security product and service manufacturer. As China Network Security has put forward the "new four modernizations" strategy of network security-- universal passwords, basic localization, intelligent attack and defense, and security services, as the main unit of China Network Security in charge of information security, it undertakes more responsibility for developing cyberspace security services at the sub-group level. The company has comprehensively accelerated the transformation to security services, implemented the development idea of the "new four modernizations", vigorously developed the business of Xinchuang security, cloud computing and data security, and network security services, and expanded its products from the field of password to the field of pan-network security. business coverage from government affairs to the industry is expected to achieve horizontal and vertical expansion, transformed into comprehensive security products and services manufacturers. According to our estimates, the total market size of Weststone key product encryption machines is of the order of 10 billion (5-year average replacement period, corresponding to 2 billion yuan per year), while IDC estimates that the size of the network security market in 2021 alone is close to 8 billion US dollars (50 billion magnitude), the growth rate of the network security industry is more than 20 per cent in 2021-2024, and the market size of 2024 will reach 17.9 billion US dollars (hundreds of billions of magnitude). The company has entered the field of pan-network security from encryption. It is expected to open up more room for growth.

Profit forecast and investment rating: from 2020 to 2022, EPS is expected to be 0.21,0.25,0.30 yuan respectively, corresponding to PE in 74-63-53, respectively. As the national team in the field of domestic security, as China Dianke attaches importance to the strategic position of network security and the incentive mechanism is in place, it is expected to achieve the upgrading transformation from a password leader to a comprehensive network security product provider and maintain a "buy" rating.

Risk hint: the intensification of competition in the industry leads to the decline of product gross profit margin and the continuous growth of accounts receivable.