3Q23 performance is basically in line with our expectations.

Neusoft Group announced its performance in the first three quarters: revenue of 6.263 billion yuan,+12.6% year-on-year; net profit attributable to parent of 135 million yuan,+4.7% year-on-year; net profit deducted from non-profit of 42 million yuan, only 10 million yuan in the same period last year.

In 3Q23, the revenue was 2.373 billion yuan,+8.8% year-on-year; the net profit of parent company was 40 million yuan,-13.1% year-on-year, and the net profit of parent company after deduction was 15 million yuan, turning losses into profits year-on-year. The company's performance is basically in line with our expectations.

Trend of development

Revenue grew steadily, gross profit margin decreased slightly in the short term, and expenses were well controlled. At the revenue end, 1- 3Q23 maintained a steady growth of 13%, among which the year-on-year growth rate of 3Q23 was about 9%, which was improved compared with that of 2Q23. At the level of gross profit margin, the comprehensive gross profit margin of 1- 3Q23 Company decreased slightly by 1.6ppt year-on-year, which fluctuated between quarters due to the influence of project implementation and delivery rhythm. The expense end was well controlled, the absolute value of sales/management/R & D expenses was +1%/+5%/+9% year-on-year respectively, and the total expense ratio of the three expenses decreased by 1.5ppt compared with the same period last year. In addition, 1- 3Q23 Innovation Business Subsidiaries reduced losses as a whole, and the investment losses of associated enterprises decreased by about 28% year-on-year, and the profit end maintained positive growth under the comprehensive influence. Contract liabilities have risen steadily, and there is still some pressure on cash collection due to the impact of the operating rhythm of downstream customers. The balance of contract liabilities of 3Q23 Company reached RMB 4.926 billion yuan,+6% year-on-year. Affected by macro-economy and downstream customer operation and budget rhythm, the net cash flow gap of operating activities of 1-3Q Company expanded year-on-year.

The traditional business maintains its leading position in the market and continues to explore big data and AI innovation. According to the "2023 China Digital Government Application Development Research Report" released by CCID Consulting, Neusoft continued to lead in the market competitiveness of "digital government software and application services" and ranked first in the leadership quadrant in the fields of human resources, social security and medical insurance for three consecutive years. In the field of intelligent automobile, according to CCID Consulting, Neusoft Group has been continuously shortlisted as TOP 10 supplier in three sub-fields: cockpit domain controller, intelligent cockpit software i.e. system, vehicle-mounted 5G/V2X module and system; Neusoft Ruichi has been awarded TOP 10 supplier in the field of intelligent middleware of whole vehicle.

In addition, the Company actively promotes the innovation and application practice of big data, artificial intelligence and other technologies, and releases large models and AI enabling applications in the medical field, which we believe is expected to become a new revenue growth driver.

Profit forecast and valuation

We maintain our revenue and earnings forecasts for 2023/2024 basically unchanged, maintaining an outperform industry rating and a target price of 15 yuan (based on 2023 SOTP, corresponding to 58/31 times 2023/2024 P/E), with 60% upside to the current share price. The current share price corresponds to 37/20 times 2023/2024 earnings.

Risk

New orders expanded less than expected; innovative business subsidiaries continued to lose money; market competition intensified