21-year net profit slightly exceeded expectations

Year-on-year revenue growth of 12.0% to HK $78.34 billion in 21 years was mainly driven by cloud computing and enterprise systems business, which was slightly lower than our expectation of 2.5%. Gross profit increased by 16.4% to HK $3.64 billion, and gross profit margin increased by 0.1% to 4.6%. Net profit rose 23.1% year-on-year to HK $1.31 billion, slightly exceeding our forecast of HK $1.29 billion, mainly due to the better-than-expected performance of other net income and share of the associated company's profit. The number of operating turnover days increased to 46 days from 43 days in the same period last year, maintaining a healthy level.

The cloud computing business has maintained rapid growth, with the goal of becoming the largest integrated cloud service provider in Asia, with revenue growing at a high rate of 39.3% to HK $2.34 billion compared with the same period last year, accounting for 0.6% of the year-on-year increase in revenue to 3%. The company aims to become the largest integrated cloud service provider in Asia. The main advantages and motivations include:

(1) the company has established long-term and extensive cooperative relationships with global leading cloud manufacturers such as Huawei Cloud, Aliyun, AWS, VMware, Azure, etc., and has a deep precipitation of customer resources; (2) it has the ability to provide customers with value-added services, including cloud consulting, cloud migration, cloud operation and maintenance, and cloud native services, so as to build the whole lifecycle of the cloud. (3) the company acquired RightCloud, the core product of Cloud Star data at the end of 2020, to expand the areas of multi-cloud and hybrid cloud, and help customers to establish a multi-cloud and hybrid cloud management system more efficiently and quickly, which can meet the diversified needs of customers; (4) the company integrates its own software intellectual property rights and value-added service capabilities to focus on multiple sub-domain customer groups, with a first-mover advantage. In terms of government cloud, it has been settled with 30 provinces and cities, including Changsha, Shandong, Zhejiang, Jiangsu and so on. In the future, government cloud will also become a subdivision industry for the company to focus on development. In the energy industry, the participating State Grid project has become the largest multi-cloud management project in China, supporting the hybrid cloud and multi-cloud management of State Grid from headquarters to the following 27 provinces. In the future, it is expected to expand more energy industry projects by replicating this successful experience. (5) Last year, the company joined hands with Huawei to expand the artificial intelligence computing center, and has carried out projects in the four mid-western artificial intelligence demonstration zones (Wuhan, Chengdu, Central Plains and Xi'an) that have won the first batch of the Ministry of Science and Technology. It is expected that more artificial intelligence and supercomputing center projects will be launched in the future; (6) expand customers in new industries such as finance. On the whole, we expect that the demand for cloud computing and cloud-derived services will continue to grow. With the existing cloud lifecycle service capabilities, companies can enable the digital transformation of more enterprises, thus driving the sustained and rapid development of their own cloud computing business.

The business growth of enterprise systems is steady, the basic demand for IT continues, and the sales of enterprise products will continue to improve in the future. Enterprise systems business will continue to maintain steady growth, with revenue rising 6.8% year-on-year to HK $43.71 billion, accounting for 55.8% of revenue, which is still the company's largest source of revenue. A large number of new enterprise-level cooperation projects have been added in the past 21 years, such as the overall upgrade of the power relay station IT system of Singapore Electric Power Group, the super-integrated infrastructure solution of the Comptroller and Accounting Bureau of the Ministry of Finance of Thailand, and the security maintenance project of the Philippine Public Safety savings and loan Association. We expect overall IT infrastructure demand to continue and enterprise product sales to continue to improve.

Consumer electronics growth is strong and is expected to maintain solid growth in the future. Consumer electronics business revenue rose 18% year-on-year to HK $32.28 billion. The company's precise layout of online and offline omni-channel services, including revenue from the second largest customer JD.com (9618 HK;JD US) and the fifth largest customer Shopee increased by 29% and 65% respectively compared with the same period last year. According to the product revenue distribution, personal computers / tablets, personal storage and printers / monitors contribute nearly 80% of the revenue. As the company covers a wide range of electronic products, which can greatly meet the market demand, the business is expected to maintain steady growth in the future.

Raise the target price to HK $10.80 and maintain the "buy" rating

We slightly raised our profit forecast to + 6.4% of 22E/23E 's net profit of 4.7% to 1.44% of 1.56 billion Hong Kong dollars, and introduced 24e net profit of 1.67 billion Hong Kong dollars, corresponding to 22E/23E/24E 's EPS of 1.0 pounds 1.1 pounds respectively. With reference to the current interbank valuation, it is valued at 9 times the 22-year target PE, with a slightly higher target price to HK $10.80, a potential increase of 35.5 per cent, maintaining a "buy" rating.

Risk tips: (1) macroeconomic impact; (2) intensified market competition; and (3) cloud computing expansion is not as expected.