Crypto Stocks Surge on Rumors! Digital Certificates in Decline

After experiencing a significant surge in its stock price just recently,the Chinese cybersecurity firm Digital Authentication (300579.SZ) has started to see its rapid growth subside.This comes after the stock hit its upper limit gain,often referenced as a "20CM" limit in local terms,indicating a 20% price increase within a trading day.

As of December 2nd,Digital Authentication's shares closed at 34.66 yuan,marking a modest increase of 0.93%.However,during the trading session,the stock saw a peak surge of over 7%.Just a few days earlier,on November 29th,it had spiked by an impressive 19.99%,settling at 34.34 yuan.At this juncture,the net inflow of major capital into the company reached a staggering figure,representing the highest levels recorded in over seven years.

Data from Wind,a financial data platform,highlighted that by the end of November 29th,an astonishing 204 million yuan had been netted into Digital Authentication's stocks.This steady influx of capital over two consecutive days marked a total net inflow of 222 million yuan,the highest since January 11,2017.

Digital Authentication has carved out a niche for itself among a select few cybersecurity firms in China.The company is not just about safeguarding users’ digital assets but also ensuring the reliable operation of various information systems across numerous sectors,including government,finance,health care,enterprise,and education.

Recently,the firm made headlines with its innovative launch of the "Kunmi" encryption computing power platform.This platform employs domestically-produced CPU chips,embodying a trusted execution environment (TEE).Described as a software-defined architecture for encryption computing capabilities,Kunmi can centrally manage encryption power,offering comprehensive services in areas like edge computing,privacy computations,cloud encryption services,and compliance with data protection regulations.

In its midway report for this year,Digital Authentication reiterated its commitment to enhancing the Kunmi platform’s features and promoting its all-in-one device.However,not all news has been positive; the company reported a decline of about 9.99% in revenues from its electronic authentication services,amounting to 140 million yuan in the first half of the year.Conversely,it saw significant growth in its network security products,although their profit margins rapidly declined,dropping approximately 13.57% to 52.4% year-on-year.

Despite attempts to reach out for comments regarding the Kunmi platform and its operational status,the firm did not respond effectively by the time of publication.Looking into the financials,the 2024 interim report revealed that Digital Authentication's revenues stemmed primarily from electronic authentication services (140 million yuan),network security services (106 million yuan),network security products (102 million yuan),and security integration (65.32 million yuan),showcasing varying growth trajectories across these segments.

The drop in electronic authentication revenues is attributed to delays in project settlements.On the flip side,the surge in revenues from network security products parallels heightened investments in R&D and product optimization,signaling a concerted effort to boost competitive advantage.

While the growth in network security product sales is commendable,there's an alarming uptrend in operating costs,which surged by an eye-watering 79.87% to approximately 48.47 million yuan this year alone.Digital Authentication's interim report characterized these climbing costs as arising from raw materials,labor,and other expenses,particularly influenced by the same-period revenue increases correlating with heightened material costs,which soared by nearly 39% to 84.52 million yuan.

When aggregating financial performance over the first three quarters of this year,Digital Authentication saw its total revenues reach 677 million yuan,reflecting a year-on-year increase of 14.62%.Yet,the soaring operating costs,at around 343 million yuan,represented a 21.99% annual increase.

Moreover,the first three quarters witnessed significant rises in selling and administrative expenses,which climbed approximately 7.86% and 14.42%,totaling around 132 million yuan and approximately 95 million yuan,respectively.In contrast,R&D expenditures reported a slight decrease of around 3.52% to roughly 154 million yuan.

In the 2024 semi-annual report,Digital Authentication elaborated on its strategy to ensure the competitiveness of its products and solutions.They indicated that the increase in expenses is tied to an ongoing push for new technological applications and enhancing market outreach while also incurring share-based payment costs due to the implementation of a stock incentive plan in 2023.

The company experienced a net loss attributable to shareholders of approximately 27.14 million yuan,as well as a non-recurring loss of 31.37 million yuan,a significant deterioration compared to the previous year.Particularly telling is the fact that in the year following its listing in 2016,Digital Authentication consistently showcased profitability until 2023,a year that marked its first substantial net loss of 47.20 million yuan on record.

Digital Authentication attributed these losses to slower-than-anticipated project advancements that impacted overall revenue figures.This inconsistency along with rising expenses from new technology developments fueled the financial challenges faced during this period.

As they navigate through challenges,the company still acknowledges the steep target ahead—an ambitious revenue goal of 1.5 billion yuan by 2024.On June 28th,their disclosure regarding incentive stock grants indicated that the performance assessment threshold for the first vesting period is set with a target growth rate of no less than 70% based on the average revenue recorded between 2019 and 2021.

To put this into perspective,Digital Authentication's revenue goal for 2024 is set at an eye-popping 1.518 billion yuan.However,during the first three quarters of this year,their figures stood at approximately 677 million yuan—only meeting 44.60% of the annual target and leaving them with an 841.1 million yuan shortfall.

The firm has noted that its revenue system experiences seasonal fluctuations,with the fourth quarter traditionally contributing significantly higher revenue proportions.Historical data from the years 2020 through 2023 shows that fourth-quarter income represented percentages of 52.59%,50.69%,48.18%,and 39.26% respectively.

Digital Authentication elaborates on the seasonal variations,drawing attention to the fact that government agencies are pivotal to its integrated services and tend to allocate annual purchase plans in the first half of the year while tendering and project settlements occur primarily in the latter half.

On an additional front,the company has made strategic moves towards enhancing its financial management through investment in wealth management products.The Q3 report for 2024 noted that due to increased purchases of bank financial products,Digital Authentication's financial assets surged by 50% to around 150 million yuan by the end of Q3.

In an announcement dated August 29th,the company confirmed its intention to deploy up to 200 million yuan of idle funds for cash management aimed at purchasing low-risk financial products characterized by high safety and liquidity.

Digital Authentication reassured shareholders that these financial maneuvers would not impede regular operational needs but would rather enhance the efficiency of liquidity usage,ensuring consistent revenue growth.However,as of September 30,2024,the company witnessed a staggering 54.81% dip in monetary funds compared to the beginning of the year,amounting to 181 million yuan.

It’s noteworthy that this decrease in liquidity isn’t solely a byproduct of investing in financial products but also reflects a drop in net cash flow from operating activities,which reported a deficit of approximately 131 million yuan during the first three quarters.