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Our reporter Zhang Mei and Chen Feng from Beijing reported

Yang Tao, a doctoral graduate of the National University of Defense Technology in 1993, was tragically hit by a military-wide procurement ban issued by his "alma mater" the National University of Defense Technology 31 years later.

Recently, Kylin Security (688152.SH), a well-known domestic information technology company, was caught in a public opinion storm due to a bid-rigging scandal. Its chairman is Yang Tao, and the procurement ban for the entire military was issued by the Management and Support Department of the National University of Defense Technology.

Did Yang Tao use his relationship with his alma mater to collude in bidding? "No, it was the company that colluded in bidding," a staff member who answered the Qilin Xinan information disclosure call told a reporter from the China Times on July 16.

Without the "defense business advantage", can the company still rely on for survival? Qilin Xinan told our reporter that the company is currently deeply engaged in the power and defense industries, especially in the power sector. While continuing to strengthen the dispatch of traditional power systems, the company actively participates in the construction of new power dispatch, distribution, and substation systems.

The "pride of national defense" is subject to a procurement ban by the entire military

In technology-oriented enterprises, Chairman Yang Tao may be Kylin Security’s greatest “asset”.

As early as 1993, Yang Tao obtained a doctorate in computer science from the National University of Defense Technology and holds the title of senior engineer. In that era when computers were not yet widely available and there were still few college students, Yang Tao, who had a doctorate, published a research paper on the improved Bell-laPadula model for privilege management in secure operating systems in the journal Computer Research and Development.

He was also recognized as a "national leading talent" by the Office of the Talent Work Leading Group of the Changsha Municipal Party Committee, and a leading talent in scientific and technological innovation and entrepreneurship in Changsha. In addition, Yang Tao has led national projects many times, including "Information Security Special Project", "Core High-tech Basic Project" and "Electronic Information Industry Development Special Project".

He also presided over the research and development of the "UNIX Operating System Security System" and "IP Network Encryption Machine" commonly used by netizens. Both projects have been recognized by the national science and technology achievement promotion plan. In 2020, Yang Tao also won the first prize of Henan Science and Technology Progress Award and is the inventor of many invention patents of the company.

At Kylin Security, Chairman Yang Tao is not only responsible for the company's R&D strategy formulation, guiding the core technology direction, and leading the development of new products, but also personally promotes the development and evolution of Kylin Security's operating system. Kylin Security's core products, such as cloud desktop, lightweight cloud platform, and secure storage system, were also developed by the company under the leadership of Yang Tao based on domestic operating system technology.

However, Kylin Security, which is determined to lay the foundation for the development of domestic information construction security platforms and domestic security applications, was recently severely punished by the military procurement ban for collusion in bidding.

According to the "Decision on Penalty for Violations" (School Management No. [2024] 219) issued by the Management and Support Department of the National University of Defense Technology, Kylin Security was found to have engaged in collusion in bidding during the procurement activities of a cloud desktop system construction project.

As a punishment, Qilin Xinan and other companies controlled or managed by it are prohibited from participating in the procurement of military materials and engineering services for one year. This includes prohibiting other companies controlled or managed by Qilin Xinan's legal representative Yang Tao from participating in the above-mentioned military procurement activities for one year. The punishment will take effect from January 29, 2024 and end on January 28, 2025.

Collusion in bidding, also known as bid rigging or bid rigging, is the process of colluding with each other through improper means to make prior agreements or coordination on key matters in the bidding in order to achieve a specific purpose.

In fact, Kylin Security issued the "Announcement on Being Included in the Military Procurement Suspension List of the Military Procurement Network" as early as February 2 this year. For the company, the recent announcement also means that "the shoe has dropped."

In the announcement, Kirin Security stated that the relevant contracts signed before the suspension date can still be executed normally; it is expected that the matter will have a certain impact on the company's operations in the short term, but it will not affect the company's continued operations. At the same time, the company also pointed out that related equipment procurement activities other than military procurement (military material engineering service procurement activities) are expected to be able to participate normally, and cooperation with military industrial groups, channels and industry customers can also be carried out normally, and the company's products can still be supplied to partners and industry customers.

On July 16, the company's stock price closed at 32.6 yuan, up 2.19%. Prior to this, it had been fluctuating and falling for two days. Looking at the long-term trend, from July 1 to now, Kylin Xinan's stock price has fallen by 15.81%.

"The company attaches great importance to market value management." The above-mentioned staff member told the China Times reporter when talking about the stock price, however, the company's stock price fluctuations are affected by many factors such as industry cycles and macroeconomic environment.

The proportion of military procurement is not high, but the company continues to lose money

Kirin Security said that its reliance on military procurement business is not high. According to the announcement, in 2023, the revenue from material engineering services directly sold to defense unit users will only account for 9.14% of the company's overall operating income.

However, the fact is that under the military procurement ban, Kirin Security's profitability declined significantly in the first quarter of 2024.

In the first quarter of 2024, Kirin Xinan's operating income was 44.1394 million yuan, the net profit attributable to shareholders of the listed company was a loss of 7.2737 million yuan, and the non-net profit loss was 13.5635 million yuan. In comparison, in the same period last year (i.e. the first quarter of 2023), Kirin Xinan's operating income was 34.0024 million yuan, a year-on-year increase of 21.43%; the net profit attributable to shareholders of the listed company was a loss of 1.3233 million yuan, and the non-net profit loss was 4.0937 million yuan.

Judging from the performance data, although the operating income in the first quarter of 2024 increased slightly year-on-year, the net profit loss attributable to shareholders of the listed company expanded significantly from 1.3233 million yuan in the same period last year to 7.2737 million yuan.

The decline in defense business revenue was foreshadowed. In 2023, the second year after its listing, Kylin Security's revenue decreased by 59.18% year-on-year, and its net profit was -30.1183 million yuan, while it was profitable in the previous year.

In response to a reporter from the China Times, Kylin Security said that the ban is not expected to affect the company's continued operations. At the same time, the company is seizing the market opportunities of the industry's information technology development and digital transformation, strengthening the layout of the marketing network, continuously improving the construction of the channel system and product ecology, and rapidly advancing business expansion in important industries such as government affairs, energy, finance, operators, transportation and education. In the first half of 2024, the company expects its operating income to maintain steady year-on-year growth.

According to public information, Kylin Security launched cloud desktop products based on virtualization technology under the cloud computing model. With the increase of network environment bandwidth, the improvement of back-end server hardware computing performance, and the continuous optimization of cloud desktop protocols, this cloud desktop product has been welcomed by the market, and many customers have chosen it to replace traditional PCs. The application scenarios cover a wide range of fields including national defense, electricity, government affairs, education, finance, transportation, and medical care.

Kylin Security was established in 2015 and listed on the Shanghai Stock Exchange in 2022. The company is headquartered in Changsha, Hunan Province, with 680 employees. The legal representative is Yang Tao and the actual controller is Yang Tao. The company's industry is horizontal general software.

Defense revenue plummets, what do companies rely on to survive

What measures will the company take after losing its traditional advantage of "military procurement"? The staff who connected the phone told the reporter of China Times that Kylin Xinan is actively working on other industries such as government affairs, energy, finance, and operators to seek new growth points.

It is worth noting that Kylin Security's defense industry revenue dropped sharply from 304 million yuan in 2022 to 64.607 million yuan in 2023, a year-on-year plunge of 78.8%, and the proportion of defense revenue also dropped sharply from 76.84% to 40.74%.

The sharp drop in defense revenue directly led to a sharp decline in the company's overall revenue. In 2023, Kylin Security achieved operating income of 163 million yuan, a year-on-year decrease of 59.18%; net profit loss was 30.1183 million yuan, a year-on-year decrease of 123.37%.

In response to the 78.8% year-on-year decline in defense industry revenue, Kylin Security responded to a reporter from the China Times on the night of July 16, saying that in 2023, the company's defense industry revenue decline was mainly due to the slowdown in the progress of customer information construction procurement and the delivery and acceptance of some projects. In the long run, the demand of defense industry customers will continue. In the first half of 2024, the company expects operating income to maintain steady growth year-on-year.

The company's advantage lies in its military involvement, but it has been subject to a military-wide procurement ban. Does the company have other advantages on which it can survive?

Kirin Security told reporters that the company is currently deeply involved in the power and defense industries, especially in the power sector. While continuing to strengthen the dispatch of traditional power systems, the company actively participates in the construction of new power dispatch, distribution, and substation systems. Taking advantage of the Kirin Security operating system as the mainstream domestic operating system in the power industry, the company promotes its layout in the power industry. In addition, the company pays attention to the development opportunities in the power grid digitalization information innovation sector and the new energy power generation field, and expands customer needs and application areas.

Kirin Security said that with the advancement of information technology policies in the power industry and the construction of key information infrastructure of new power systems, the demand for domestic operating systems, cloud computing and commercial cryptographic products is expected to increase, which is expected to drive the company's related product sales growth.

Kylin Security told the China Times reporter that the company has also strengthened market expansion in government affairs, energy, finance, operators, transportation and education, and improved the construction of marketing networks and channel systems. In May 2024, Kylin Security's server operating system products passed the security and reliability evaluation of the China Information Security Evaluation Center and obtained the security and reliability level I certification.

"In addition, in response to the suspension of CentOS services, the company has provided CentOS system migration tools and Kylin Security CentOS security hardening system to meet the needs of industry users in dealing with suspension of services and provide smooth migration and security hardening services." Kylin Security stated that the company is rapidly expanding its downstream industry customers and its revenue structure is expected to be further optimized.

Editor-in-charge: Ma Xiaochao Editor-in-chief: Xia Shencha