In '23, the company achieved remarkable results in developing fields such as cloud service providers and operators, driving the company's revenue growth; continued increase in R&D and sales management investment led to pressure on profits in '23. We expect that as the company's new products gradually enter the market, end users will expand further, and continue to be promoted by superimposing credit, innovation and commercial confidentiality policies. In view of the significant decline in the company's profit in '23, the investment rating was downgraded to “increase holdings”.

Incident: The company released reports for the fiscal year of 2023 and the first quarter of 2024. It achieved operating income of 359 million yuan, YoY +5.54%; realized net profit of 67 million yuan, YoY -37.26%; realized net profit without return to mother of 58 million yuan, YoY -41.36%; achieved net operating cash flow of 87 million yuan, compared to -06 billion yuan in the same period last year. 23Q4 achieved revenue of 122 million yuan in a single quarter, YoY -27.05%; realized net profit of 0.28 million yuan, YoY -64.37%; realized net profit without deduction of 0.26 million yuan, YoY -65.87%. The 24Q1 quarter achieved operating income of 49 million yuan, YoY +36.35%; realized net profit to mother of -10 million yuan, an increase in losses over the previous year; realized deducted non-net profit of -13 million yuan, an increase in year-on-year losses.

It has achieved remarkable results in developing end users, and continues to increase investment in R&D and sales management. In terms of revenue structure, the company's revenue growth mainly comes from achieving obvious results in developing fields such as cloud service providers and operators, and the acquisition of Jiangnan Keyou increased the company's performance. Split by customer, the company's end users achieved revenue of 104 million yuan (YoY +67.60%) in '23, increasing the share of revenue by 10.75pct to 29%; by product split, the company's cryptographic boards/cryptographic systems/cryptographic services and other/cryptographic chips achieved revenue growth of 21.05%/1.56%/-24.78%/ 273.32/ 128.28%. Among them, the high increase in cryptographic services and other revenue was mainly due to an increase in the share of end customers, which led to an increase in revenue from cryptographic services. With the company's deep integration with Jiangnan Keyou, we believe the company will accelerate the expansion of the financial cryptographic market. In terms of expenses, the company continued to increase investment in R&D and sales management. The sales/management/R&D expenses ratio for the full year of '23 was 25.72%/11.02%/27.43%, an increase of 9.84/3.15/7.35 pcts over the previous year. In terms of cash flow, the company's cash flow from operating activities in 23 years was mainly due to the fact that the company attached great importance to accounts receivable management and collection work, and took measures in various areas such as sales staff performance assessment and customer credit management, which achieved remarkable results.

Improve the chip scenario-based layout, and promote the continuation of credit innovation, commercial secrets policies, and new technology. In terms of chip scenario-based layout, in 23, the company launched three new cryptographic security chips, including the XT100, XT200, and XR100, which were mass-produced and successfully applied to the market during the reporting period; in terms of new technology, the company launched a “national production” series of cryptographic products. In 2023, the company obtained model certificates and officially sold abroad; in terms of policy, the “Commercial Password Management Regulations” continued to drive the industry. In terms of new technology, the company actively promoted secret reviews and accelerated promotion period; in terms of new technology, the company Maintaining sensitivity to cutting-edge cryptographic technology, new research and development results have been achieved in high-speed hardware implementation and commercialization of anti-quantum cryptographic algorithms, and a new product, the “Quantum Anti-Quantum Privacy Computing All-in-One Computer”, has been released.

Downgraded to “Overweight” investment rating. Commercial secrets industry policy incentives continue, the company's new products are gradually entering the market, and the end user development results are remarkable. Considering the obvious decline in the company's profit in 23, the net profit forecast for 2024-2026 was lowered to 0.89/ 1.13/144 million yuan, and the investment rating was lowered to an “increase in holdings” rating.

Risk warning: Policy implementation falls short of expectations, industry competition intensifies, and costs rise