The results for the first half of 2022 are in line with market expectations
The company announced its results for the first half of 2022: revenue of 69.253 billion yuan, up 8.0% year on year; net profit of 1,896 billion yuan, up 4.6% year on year, in line with market expectations.
Development trends
The digital transformation of operators has led to the steady development of the company's operator market revenue. In the first half of 2022, the company's revenue from the domestic telecom operator market was 36.529 billion yuan, up 9.2% year on year; of these, revenue from China Telecom increased 18.8% year on year to 22.725 billion yuan. Among them, operator ACO1 business revenue increased by 38.8% year-on-year. The main reason is that operators' digital transformation is accelerating, and the company is actively developing cloud and network security services. Despite the slowdown in operators' 5G capital expenditure investment, we believe that the change in operators' capital expenditure structure will bring the company demand for construction and services in IDC, gigabit optical networks, cloud computing, etc., and we are optimistic about the steady development of the company's future operator market revenue.
Construction in key areas has boosted revenue growth in the customer market, and revenue from overseas markets has picked up. In the first half of 2022, the company's revenue from the inbound market increased 6.5% year over year to 31.173 billion yuan. Driven by fields such as digital government and smart cities, ACO revenue in the 1H22 customer market increased 26.1% year-on-year. The company is actively developing customers in the construction, power and other industries. The amount of new contracts signed in the 1H22 customer market increased 6% year-on-year, exceeding 40.9 billion yuan. We believe that benefiting from the digital transformation of key industries, revenue from the inbound market may continue to grow by double digits this year. 1H22's overseas market revenue stopped falling and rebounded, up 12.7% year on year to 1,551 billion yuan, mainly due to implementation results of major projects in the Middle East and Southeast Asia; among them, overseas market BPO and TIS business revenue increased 111.2/ 11.8% year on year, respectively.
R&D investment enhances business strength, reduces costs, increases efficiency, and controls cost levels. The company's R&D investment in the first half of the year increased by more than 18% year-on-year to 1.92 billion yuan, mainly investing in product development for industry applications. In recent years, the company has actively carried out cost control and implemented cost reduction and efficiency. The share of 1H22 sales, management and general expenses in revenue dropped slightly to 8.5% year-on-year. We believe that as the company actively develops its digital business, the downward trend in profit margins will slow down in the future.
Profit forecasting and valuation
Profit forecasts for 2022 and 2023 remain largely unchanged. The current stock price corresponds to 2022/2023 5.8 times/5.5 times the price-earnings ratio. It maintained an outperforming industry rating, but due to a slowdown in capital expenditure investment by the company's main customer, telecom operators, we lowered the target price by 12.6% to HK$4.37, corresponding to 7.8 times the 2022 price-earnings ratio and 7.4 times the 2023 price-earnings ratio, which is 34.9% upward from the current stock price.
risks
The operator's capital expenditure fell short of expectations, and the implementation progress of Eastern Digital Western Computing fell short of expectations.