Corporate history
Qi An Xin (688561:SH) was founded in 2014 by Qi Xiangdong. It used to be the enterprise security partner of Qihoo 360 (601360:SH). Qi An Xin Limited was incorporated in 2014 and controlled from that point by Qihoo 360. In September 2016, Qi Xiangdong increased his control over Qi An Xin through a massive capital injection. From 2014 to 2019, Qi An Xin benefitted from being free to use some of Qihoo 360's copyrights and licenses. The company split off from Qihoo 360 in April 2019 to become one of the leading groups in Chinese cybersecurity.
Qi An Xin's progress in the growing realm of cybersecurity was helped greatly by the boost from Qihoo 360 – it also progressed through buyouts, notably of Netentsec (Chinese: 网康) in 2014 and Legendsec (Chinese: 网神) in 2016 and a few other firms. During the same time, the company also joined campaigns like the 'Clean Up the Internet' initiative carried out by the Ministry of Public Security. These decisive gestures helped to build its brand among clients.
IPO
In July 2020, Qi An Xin went public on the Shanghai exchange's Star Market. The CNY 4.5 billion capital raised will be used in seven distinct directions, according to the company.
We believe these projects will underpin future business expansion, satisfying the needs of high-profile cybersecurity clients under a more complicated IT infrastructure.
Business introduction
The company provides five categories of product: infrastructure security (IS, 4.5% of its total revenue in 2019 fiscal year), the next-generation IT infrastructure protection (NGIT, 43.2%), big data detection and management (BDDM, 18.7%), cybersecurity services (11.6%) and hardware and other services (21.8%). IS products help clients to build defense systems based on identity recognition, users' behaviors and applications, including identity-centered zero-trust security products for dynamic access control. NGIT packages protect pan-terminals applying edge, cloud computing, big data and other new technologies. Through using big data analysis and artificial intelligence, BDDM tools offer functions such as threat detection, situational awareness, security management, etc. Besides, cybersecurity services include consulting, evaluation and analyzing. The firm also sells hardware supporting Internet security.
Why to long the stock?
We expect the company will keep enjoying the updraft from the sector's tailwinds. As we stated in the previous article, the Chinese cybersecurity market size ought to keep growing at around a 21% CAGR in the next five years. In detail, regulations like China's Multi-Level Protection Scheme law 2.0 (MLPS) is a new standard of protecting different classes of information in China, starting a new round of updating cybersecurity products. Qi An Xin, as a leading brand locally, will benefit from this trend.
Qi An Xin will continuously get traction from its good relationship with potential customers. The founder of the company, Qi Xiangdong, used to work as deputy director of the communications technology bureau of Xinhua News Agency, and still holds several key positions in government agencies. That lets the company build a good relationship with the government and related organizations, acquiring some orders. Meanwhile, many state-owned entities are backing the company, including China Electronic Corporation, Financial Street Capital. We think these relationships are beneficial, as these types of entities are the biggest buyers of cybersecurity services, providing revenue visibility and topline-increasing opportunities.
Leading sales capability reflects on the fast-growing business. Sales are a key to a fast-growing yet unprofitable software business. The company leverages its products through direct sales (31.5% as of total revenue) and partnerships (68.5%). Qi An Xin's topline boosted by 121% and 74% in 2018 and 2019, due to several buyouts and organic growth.
More specifically, in contrast to Sangfor, we found the per-client revenue of Qi An Xin to be higher than Sangfor's, meaning a big order focused sale strategy. In 2019, Qi An Xin's total direct-selling orders (31.5%) valued at CNY 740,000 on average. Instead, Sangfor's revenue was less centralized: its orders were between CNY 50,000 to 60,000 in 2017.
On the other hand, Qi An Xin's gross margin was 55% and 57% in 2018 and 2019, which was much lower than Sangfor's 84.8% and 82.5%. One primary reason is that the business is still expanding, and so is yet to achieve a significant scale. We think Qi An Xin also intended to lower its prices and acquire customers first. Having developed a significant amount of clients, the company can upgrade rates as per the digitalization requirement, leading to less price-sensitive customers and leading products.
Compared with its peers, Qi An Xin attaches more importance to research and development (R&D), which supports its future business expansion. Its R&D fees are significantly higher than those of competitors like Sangfor and Venustech, which are essential as cybersecurity firms need cutting-edge technology to resist attacks. With the prevalence of the Cloud, IoT (Internet of Things) and big data, this also fulfills more complex needs around Internet security.
Valuation
Due to the company's fast-growing business, we believe the P/S methodology is the most suitable for valuation.
Key assumptions:
From 2020 to 2022,
1. The IS revenue is still small and given its fast-growing feature, we assume it will increase by 80%, 60%, 40%. We also believe the company could increase the prices of product offerings in the next three years. The Gross margins will be 81%, 85% and 82%.
2. Affected by the pandemic and the normalization of the new generation IT infrastructure revenue, it will increase by 36%, 38%, 34%. Besides, we think the company could increase the prices of NGIT products. The gross margin will be 74%, 74.5% and 75%.
3. Due to the strong need for big data products, its big data revenue will increase by 40%, 43%, 40% and the gross margins will maintain 70%.
4. Cybersecurity service revenue increases by 34%, 38%, 34% as the slowdown in growth and the gross margins will be unchanged.
5. Hardware and other revenue will increase by 30%, 25%, 25% as the industry is transiting to a service business instead of selling hardware. The gross margins are 3%, 3% and 3%, reflecting a normalized margin.
Revenue model:
We consider the primary competitor of Qi An Xin to be Sangfor, as the two companies share similar revenue sizes, business models, brand awareness. Thereby we choose 19 as the PS ratio for Qi An Xin in 2020. The target price will be CNY 120.7 per share. The current price closed at 104.5 apiece on September 3, 2020. Thus, we give a buy rating.