Demand for innovation is recovering, and the company's 24-year revenue is expected to recover at an accelerated pace

GEL Software is one of the earliest manufacturers in China to develop and launch a public key infrastructure PKI (Public Key Infrastructure) platform. Based on PKI technology, the company has formed three types of business layout: PKI infrastructure products, PKI security application products, and general security products. Its main customers include key industries such as government, finance, and military industry. In '23, due to the basic completion of the Party, government, and credit innovation and the slow development of industry credit and innovation, the progress of the company's core business slowed down. Considering the recovery in industry demand for credit and innovation, the company's revenue is expected to recover at an accelerated pace in '24. We expect the company's EPS for the year 23-25 to be 0.09, 0.32, and 0.40 yuan respectively, which is comparable to the company's average valuation (wind) of 24E 35.2x PE. Considering the company's advantageous layout in emerging security fields and the acceleration of industry expansion, we will give the company 24E 55x PE with a target price of 17.60 yuan to maintain “buying”.

The “annual review” compounded the recovery of credit and innovation demand begins. The company's business restoration is about to begin. In September 2023, the National Cryptographic Administration announced the “Administrative Measures on the Security Assessment of Commercial Cryptographic Applications”. Article 9 stipulates that after the completion and operation of important networks and information systems, their operators shall conduct a security assessment of commercial password applications at least once a year by themselves or by entrusting commercial password testing agencies to ensure the correct and effective operation of the commercial password guarantee system, marking the commencement of the “annual review” of the critical review. We believe that thanks to the continuous improvement of top-level policies and evaluation systems, the transformation and upgrading of commercial cryptography has gradually become the consensus of critical information infrastructure industries such as finance and electricity, and the prosperity of the commercial confidential industry may continue to rise. At the same time, demand for credit facilities is gradually picking up, and the company is speeding up business expansion in industries such as operators, water conservancy, tobacco, and transportation. We believe that with the gradual recovery of downstream demand, the company's business progress in 24 years is expected to pick up simultaneously.

Areas of advantage continue to be consolidated, and the layout of emerging technologies is leading

The company continues to consolidate its leading edge in the government industry, and government-side business is progressing steadily. The company continued to deepen business cooperation with the governments of Shanghai, Tibet, Henan and other places, promoted the upgrading of government cryptography to cloud cryptography, and realized the transformation of traditional cryptographic technology to cloud cryptographic services. In addition to this, the company pays great attention to emerging technologies such as anti-quantum cryptography, and strengthens the leading layout of new technologies through school-enterprise cooperation. The company is a participant in the G60 Science and Technology Innovation Corridor Quantum Cryptography Application Innovation Alliance (Center). The post-quantum school-enterprise joint research center jointly established with Fudan University focuses on anti-quantum cryptography design and software and hardware implementation. We believe that the company's strategic positioning is clear, and it is hoped that it will achieve the first launch of new technologies and directions on the basis of consolidating its areas of advantage.

Data elements drive the upgrading of security requirements, and the emergence of new security scenarios with broad scope for long-term growth is accelerating. The company actively conducts research and product application of data security, password applications, identity authentication, and privacy protection technologies in scenarios such as data elements, the Internet of Vehicles, and the Industrial Internet.

On October 25, '23, the National Bureau of Data was officially established, and the construction of China's data element market is advancing at an accelerated pace. We believe that the full start of the data element era may drive the continuous upgrading of security requirements. The company's traditional security products (data encryption, identity authentication, etc.) and data security products (products such as private computing, data security management, etc.) are expected to fully benefit, and the company has broad room for long-term growth.

Risk warning: The information security policy falls short of expectations, and the pace of security business development falls short of expectations.