Event: the company released its interim results for 2022, with revenue of 69.3 billion yuan, an increase of 8% over the same period last year.

Of this total, the market income of customers of domestic telecom operators was 36.5 billion yuan, up 9% from the same period last year, accounting for 53% of the revenue; the market income of domestic non-operators was 31.2 billion yuan, up 7% from the same period last year; and the overseas business income was 1.6 billion yuan, up 13% from the same period last year. This is mainly due to the company's implementation of major projects such as telecommunications network and broadband network construction in the Middle East and Southeast Asia, as well as smart watt-hour meters. The company's gross profit increased by 7% over the same period last year, corresponding to a gross profit margin of 10.5%, a decrease of 0.2% compared with 1H21, mainly affected by the decline in the unit price of business services, the impact of the epidemic, and the increase in cost rigidity and other factors. The company realized a net profit of 1.9 billion yuan, an increase of 5% over the same period last year, and the corresponding net interest rate was 2.7%.

Two-wheel drive revenue growth of operators and non-operators in the customer gathering market: the company is deeply involved in the construction of operators in data centers, gigabit optical networks, and the renovation of computer rooms, and actively expand emerging spaces such as network security and double carbon. 1H22 domestic telecom operators' business increased by 9% compared with the same period last year. However, operator business is subject to the strong bargaining power of downstream operators, there is pressure to increase gross profit margin, and the improvement of overall profit margin in the future depends on the improvement of gross profit margin of non-operator business. The revenue of 1H22's domestic non-operator customer collection market increased by 7% year-on-year under the impact of the epidemic and the adjustment of business structure. We believe that the market still has a lot of room for growth in the context of digital transformation opportunities, and is expected to achieve double-digit growth for the whole year. As the market gradually matures, the company increases the proportion of total contract integration projects and high-value business, and the opportunity to improve the gross profit margin of non-operator business becomes clearer, which drives the overall profit margin of the company to be stable.

Focusing on opportunities such as digital economy, industrial digitization and digital infrastructure, ACO business is growing rapidly: benefiting from the digital economy, the company actively promotes business transformation and expands mature areas such as digital government, smart city and intelligent transportation. 1H22 ACO (applications, content and other services) business achieved revenue of 12.7 billion yuan, an increase of 30% over the same period last year, accounting for 18% of 1H21 revenue. Is the most important driver of the company's revenue growth. While the company's traditional telecom infrastructure service revenue and business process outsourced service revenue are relatively stable due to the late stage of operator 5G construction, with 1H22 achieving revenue of 350 / 21.5 billion RMB respectively, an increase of 1% and 9% respectively over the same period last year. We expect that in the later stage, the calculation of East and West will bring opportunities such as the construction of new data centers and the transformation of existing data centers, and the company's traditional business is expected to continue to grow steadily.

Profit forecast, valuation and rating: in view of the rigid increase in upstream costs, the forecast of 22-23 net profit is reduced by 7% to 34 / 3.7 billion yuan, and the 24-year net profit is forecast to be 4 billion yuan, an increase of 7%, 8% and 8% respectively over the same period last year. Taking into account the late 5G era operator capex investment or downside, the company's growth may be affected, downgraded to "overweight" rating, maintaining the target price of HK $4.50 (corresponding to 22 / 23 8amp 7 times PE).

Risk tips: 5G construction slows; operator business gross profit margin pressure increases; non-operator business slows.