Incidents:

The company released its 2023 annual report, and achieved operating income of 2.17 billion yuan for the full year of 2023, a year-on-year increase of 9.6%; net profit to mother - 360 million yuan, a year-on-year decrease of 41.9%; net profit after deducting non-return to mother - 388 million yuan, a year-on-year decrease of 29.86%.

In Q4 alone, 2023Q4 achieved operating income of 963 million yuan, an increase of 2.38% year on year; net profit to mother was 176 million yuan, down 13.6% year on year, and net profit after deducting 168 million yuan, down 6.66% year on year.

The company also released its 2024 quarterly report. In the first quarter of 2024, it achieved operating income of 281 million yuan, a year-on-year decrease of 16.47%; net profit to mother was 200 million yuan, a year-on-year decrease of 5.75%, after deducting net profit not returned to mother - 204 million yuan, a year-on-year decrease of 4.99%.

reviews

The security service business has maintained good growth. Looking at key strategic areas, the company's cybersecurity products, cybersecurity platform, and cybersecurity service business achieved revenue of 4.55, 7.79, and 827 million yuan respectively, with a year-on-year ratio of -2.29%, +1.31%, and +24.41% respectively. We believe that security services have shown strong customer stickiness in the context of the tightening of downstream security budgets, providing good support for the company's business growth. In the future, we are optimistic about MSS and the Hengnao Security vertical model The continuous empowerment of the safety service business brings the quality and efficiency of the company's safety service business and stabilizes the company's competitive advantage in the field of safety services.

By industry, the company has achieved major breakthroughs in key industries such as public security, energy, Internet communications, central state-owned enterprises, and operators. Among them, revenue from central state-owned enterprises increased by more than 150% year on year, revenue from the medical industry increased by more than 30% year on year, revenue from the operator industry increased by more than 30% year on year (especially revenue from the telecommunications sector increased by more than 70% year on year), revenue from the Internet communication and transportation industries all increased by more than 40% year on year, and revenue from the power industry increased 20% year on year.

In terms of key strategic areas:

AI: The company released a large-scale model of Hengbrain·Security and put it into use at the Hangzhou Asian Games, and launched “Hengbrain+ Safe Operation” and “Everbrain+ Data Security” product solutions to improve security operation efficiency by more than 75%; Data Security: Building the “Anheng Digital Shield” professional brand and winning several provincial, ministerial and industry benchmark projects, the contract amount for data security-related products increased by nearly 40% year on year;

MSS: Incorporating AI capabilities, it launched a new Tianqiu AI security operation platform. Revenue increased by more than 300% year-on-year, and was widely used in various industries such as government affairs, enterprises, healthcare, education, and finance.

Personnel optimization and fee control are enhanced, and profit improvements can be expected

The number of employees in the company at the end of 2023 was 3,874, a year-on-year decrease of 11% compared to the end of 2022. Moreover, at the end of 2023, the company further strengthened fee control, and executives took the initiative to cut salaries by 15% to 30%. Judging from the fee control results, the growth rate of the company's three major expenses for the full year of 2023 was only 2%. Compared with the sharp decrease in the previous year, the three major expenses of a single 23Q4 company fell 26% year on year. Although the company's net profit to mother fell 42% year on year in 2023, and losses further expanded, we believe it was mainly affected by non-operating factors: 1) reduced government subsidies and investment income; 2) increased asset impairment losses; 3) income tax amounts affected about 75 million yuan.

The company's three major expenses fell 20% year on year in 2024Q1, and operating profit decreased 13% year on year. Considering the company's cost side optimization, we think the company's loss reduction trend in 2024 is sustainable.

The decline in gross margin was affected by revenue restructuring. In the long run, there is still room for improvement. The company's gross profit margin in 2023 was 61.78%, down 2.42 pcts from 2022; the 2024Q1 gross profit margin was 49.9%, down 6.5 pcts from 2023Q1. We believe that the main reason for the decline in gross margin is the increase in the share of security service businesses with relatively low gross margins, leading to a decline in the company's overall gross margin. However, considering that MSS and AI are improving the quality and efficiency of the security service business, we believe there is still room for improvement in the company's long-term gross margin.

Profit forecasting and valuation

Considering that the company's overall revenue growth rate has slowed due to the macroeconomic environment, and short-term gross margin has declined due to adjustments in the revenue structure, we lowered our previous profit forecast. The company's operating income for 2024-2026 is 23.36, 25.58, and 2,878 billion yuan, and net profit to mother of 0.25, 1.06, and 148 million yuan. Referring to the closing price on April 26, 2024, the corresponding 2024-2026 PE was 178, 42, and 30 times, respectively. Although the company's short-term profits are under pressure, we are optimistic about the long-term positive development trend of the cybersecurity industry under the guidance of the national security strategy. At the same time, considering that the company's future profits are expected to show good resilience under fee control measures, it maintains a “buy” rating.

Risk warning

The expansion of the new strategy fell short of expectations; profit recovery fell short of expectations; downstream customer demand recovery fell short of expectations; and market competition intensified.