Incident: Haoyun Technology recently released its 2021 annual report and the first quarter report of 2022. The company achieved a total revenue of 565 million yuan in 2021, an increase of 10.43% over the previous year, and revenue growth was relatively steady. In terms of profit, the company achieved net profit of 14.6464 million yuan, an increase of 12.25% over the previous year; after deducting non-net profit of 8.0754 million yuan, an increase of 39.12% over the previous year. In Q1 2022, the company achieved revenue of 95 million yuan, a year-on-year decrease of 28.99%; Guimu's net profit was 3,9252 million yuan, a year-on-year decrease of 64.13%. The changes in the company's performance for the first quarter of 2022 were mainly due to the relatively high revenue and profit base of Q1 last year and the increase in total R&D investment during the reporting period.

The impact of the epidemic on the cost side is under pressure: the company's business development in the past two years has been impacted by repeated epidemics and the rise in raw material prices driven by it. Due to increased costs, the company's gross margin remained under pressure in the short term. The gross margin in 2021 was 39.27%, down 4.72 pct from the previous year. In terms of cost rate, the management fee rate increased slightly by 1.46 pct. The sales/finance/R&D expenses ratio decreased by 1.21 pct/3.20 pct/0.16 pct, respectively.

Strong recovery of smart justice business: In 2020, the implementation of the Runan Technology project, a subsidiary of the company that specializes in smart justice business, was restricted due to the pandemic. In 2021, as the impact of the epidemic abated, the company's judicial business ushered in a strong recovery, and smart justice-related projects progressed steadily. During the year, the company's judicial industry business revenue reached 70 million yuan, the same as in 2019, an increase of 629.85% over the previous year, and the growth rate was significantly superior to other industry business. Furthermore, the company has successively won bids for financial IoT projects of major banks, and the steady increase in overall revenue from traditional businesses such as financial IoT and smart justice has guaranteed the company's overall revenue growth.

R&D results have been implemented, and new profit points can be expected: in 2021, the company continued to guarantee R&D under tremendous pressure on the cost side. The total R&D investment reached 56.4632 million yuan, accounting for 10.00% of operating income. The company invests heavily in R&D in new profit growth points such as low-code platforms and UWB. During the reporting period, the company's UWB series products were successfully shortlisted for the Agricultural Bank of China Co., Ltd. equipment library and successfully piloted; the low-code platform was also implemented in various application scenarios such as digital transformation and IoT management in multiple industries.

Investment advice: In the first two years, the company's business development was difficult to develop due to the impact of the epidemic and its collateral effects. The company's performance showed a steady upward trend during the reporting period. Affected by the cost side and rising expenses, the company's profit level is still under pressure. In terms of specific business, judicial business revenue was the first to recover to 2019 levels, and the steady increase in traditional business revenue overall laid the foundation for the company's revenue growth. We are optimistic that, on the one hand, the company will continue to expand its financial IoT and other businesses to guarantee overall performance, and on the other hand, it will further develop the application of leading products such as low-code platforms in various fields, cultivate new growth points, and achieve steady long-term performance growth. We expect the company to achieve operating income of 631 million yuan, 740 million yuan and 907 million yuan in 2022-2024, and achieve net profit of 22 million yuan, 28 million yuan and 41 million yuan. EPS will be 0.02, 0.03 and 0.06 respectively, and corresponding PE will be 147X, 113X and 78X, maintaining the “buy” rating.

Risk warning: COVID-19 risk; project implementation falling short of expectations; risk of rising labor costs; increased risk of industry competition.