Matters:

The company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved: operating income of 223 million yuan, an increase of 30.05% over the previous year; net profit of the mother - 269 million yuan, the same period last year - 226 million yuan; net profit after deduction of 297 million yuan, the same period last year - 250 million yuan. The company achieved 2023Q3 in a single quarter: operating income of 84.8084 million yuan, an increase of 15.04% over the previous year; net profit of net income of 792.81 million yuan, same period last year - 603.19 million yuan; net profit after deducting non-return mother - 86.993 million yuan, same period last year - 66.896 million yuan.

Commentary:

Gross margin has been rising steadily, and performance is under seasonal pressure. On the gross profit side: 2023Q1-Q3 company's gross margin was +5.13pct to 59.06%; cost side: 2023Q1-Q3 company's sales expense rate/management expense rate/R&D expense ratio was -0.14pct/-1.11pct/-7.31 pct; net profit loss after deducting non-return net profit was 297 million, mainly because the company's revenue was greatly affected by seasonality, and revenue was mainly concentrated in the fourth quarter. We expect net profit to warm up throughout the year with further improvements in Q4 revenue volume and profit management.

Firmly invest in R&D and deploy AI widely. On the cost side, 2023Q1-Q3's R&D expenses increased 17.47% year over year. In the AI big model life cycle, the company has deployed products such as distributed vector databases, large language model operation platforms, big data analysis models, big financial models, and knowledge centers. In October, Transwarp Hippo upgraded to version 1.1. The product supports vector and full-text joint search, which can improve the recall accuracy of text data, thereby improving the accuracy of large language model applications. In November, the company and Intel released a joint AIGC vector database solution to meet the high real-time query, retrieval, and recall requirements of enterprises for massive vector data.

The innovation business is stable and improving, and the big data software market can be expected in the future. The company's products have now been widely used in many pillar industries of the national economy, such as finance, government, energy, transportation, and manufacturing, etc., and have helped many customers achieve domestic replacement of some key systems in analysis scenarios. According to Sullivan's research data quoted in the “Prospectus” in the company's investment relationship activity record sheet, China's big data software market will continue to grow rapidly over the next five years. The overall software market size will reach 49.2 billion yuan in 2024, with a five-year compound growth rate of 27.5%. The big data software market can be expected in the future.

Investment advice: The growth rate of the company's software products and technical services business fell short of expectations, and the profit forecast was lowered. We expect the company's revenue for 2023-2025 to be 4.98, 6.97, and 975 million yuan, with corresponding growth rates of 33.6%, 40.0%, and 40.0%; the estimated net profit for 2023-2025 is -2.45, -1.83, and 016 million yuan respectively (the previous value for 2023-2024 was -0.95/023 million yuan, respectively). Referring to the valuation level of comparable companies, the company was given 15x PS in 2024, corresponding to the target price of about 86.40 yuan, and given a “recommended” rating.

Risk warning: the implementation of domestic replacement products falls short of expectations; increased market competition; data security risks.