occurrences

Recently, the company released the third quarter report of 2022. In the first three quarters of 2022, the company achieved total operating income of 10.819 billion yuan, an increase of 17.71% over the previous year; net profit attributable to shareholders of listed companies was 551 million yuan, an increase of 15.7% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 503 million yuan, an increase of 18.72% over the previous year.

Brief review

1. Steady growth in performance and double growth in revenue and profit.

In the first three quarters of 2022, the company achieved total operating income of 10.819 billion yuan, an increase of 17.71% over the previous year; net profit attributable to shareholders of listed companies was 551 million yuan, an increase of 15.7% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 503 million yuan, an increase of 18.72% over the previous year.

On a quarterly basis, 2022Q3 achieved revenue of 4.124 billion yuan, an increase of 5.61% over the previous year. Net profit attributable to shareholders of listed companies was 239 million yuan, an increase of 507% over the previous year. Net profit after deducting non-return to the mother was 216 million yuan, a decrease of 1.37% over the previous year. The third quarter's performance was steady, and revenue and profit increased both.

We believe that in the first three quarters, the company overcame the impact of the epidemic, increased its market development efforts, continuously launched new products, continued to promote the upgrading of the smart technology industry, and achieved steady growth in performance.

The spin-off and listing of the subsidiary Ruijie Network has been approved by the Securities Regulatory Commission. The incentive mechanism is expected to improve after listing, and performance will be further improved.

2. Gross margin increased steadily, and R&D investment increased significantly.

In the first three quarters of 2022, the company's gross margin was 34.54%, up 1.38pct year on year, and net interest rate was 7.69%, up 0.27pct from last year; in the third quarter, the company's gross margin and net profit margin were 35.64% and 8.92% respectively, up 2.27pct and 0.45pct year-on-year, up 2.06pct and 1.37pct month-on-month, and profitability grew steadily.

In the first three quarters, the company's sales expenses ratio was 11.77%, down 0.33pct from the previous year; the management expense ratio was 3.79%, up 0.58pct from the previous year; the financial expenses ratio was -0.6%, down 0.82pct; and the R&D expenses ratio was 13.72%, up 2.34pct from the previous year. The company continues to increase investment in R&D to ensure the competitiveness of the company's various business lines. In the third quarter of 2022, the company's sales expenses ratio was 11.6%, up 1.16 pct year on year; management expenses ratio was 3.48%, up 0.79 pct year on year; financial expenses rate was -0.8%, down 0.93pct year on year; R&D expenses ratio was 13.59%, a sharp increase of 3.52 pct year on year. Net cash flow from the company's operating activities was -71 million yuan, an increase of 56.44% over the previous year, mainly because the increase in the company's cash income from selling products, providing labor and purchasing products, and receiving labor payments was greater than the increase in cash expenses such as paying employees' remuneration and expenses.

3. The company is a leading ICT equipment company in China, deploying cutting-edge technologies such as NPO and CPO switches.

Many of the company's products occupy leading positions in the domestic market and have strong competitiveness. According to IDC statistics, from 2019 to 2021, the subsidiary Ruijie Network ranked third in China's Ethernet switch market share for 3 consecutive years; in 2021, China's enterprise-grade WLAN market share ranked third, with Wi-Fi 6 shipments ranking first for 3 consecutive years in 2019-2021; 2015-2020 ranked first in China's enterprise terminal VDI market share for 6 consecutive years; in 2015-2020, China's local computing IDV cloud desktop market share ranked first; 2019 The market share of IT infrastructure operation and maintenance software in China ranked first. At the 2021 OCP Summit, Ruijie Network unveiled the first NPO data center switch, which also applied silicon optical technology and liquid cooling technology; recently, the company also unveiled the first 25.6T data center switch using CPO technology. Relying on its ability to innovate and continuously deploy in cutting-edge fields, the company is expected to gain a first-mover advantage and ensure future competitiveness.

4. We recommend continuing to pay attention to the company.

As a leading manufacturer in the domestic ICT equipment industry, the company maintains strong competitiveness in many products such as switches and wireless systems, and its market share is expected to increase further. The share of the company's products in the operator market is expected to continue to increase. At the same time, the company is actively exploring overseas markets and seeking new growth points. The spin-off and listing of the subsidiary Ruijie Network is progressing steadily, which is expected to further optimize the company's equity incentive mechanism and fully release performance. We expect the company's revenue to be 16.515 billion yuan, 21,336 billion yuan, and 26.08 billion yuan respectively in 2022-2024, while the net profit of the mother is 627 million yuan, 879 million yuan, and 1,073 million yuan respectively. The current market capitalization corresponds to PE 20X, 14X, and 12X, maintaining the “buy” rating.

5. Risk warning

The company's ICT equipment such as switches and routers mainly targets customers such as data centers, etc., so if the capital expenditure of cloud vendors and operators falls short of expectations, there is an impact on the company's related product revenue; competition intensifies, leading to a sharp drop in prices, so there is a risk that gross margin will fall; the impact of the subsidiary Ruijie Network's spin-off and listing; the intensification of the epidemic will cause the company's production and product delivery to a certain risk. At the same time, IT spending of SMB customers is also at risk of falling, causing the company's demand side to be affected; raw materials such as chips play a critical role in the company's main ICT products, if The limited supply of these chips will affect the normal delivery of the company's products.