1H22's revenue slightly exceeded expectations, and its net profit was lower than expected due to personnel expansion, conservative provisions for receivables and other reasons. 1H22's revenue increased by 9.2% to HK $38.07 billion, mainly driven by cloud computing and consumer electronics, slightly exceeding our expectations of 1.1%. Gross profit margin fell 0.15 percentage points to 4.7%. Net profit fell 22.1 per cent year-on-year to HK $500 million, lower than we expected, mainly due to higher-than-expected sales and distribution expenses and administrative expenses due to Huawei Cloud team expansion, more conservative provisions receivable, epidemic and other factors. The number of operating turnover days increased by 9 days to 51 days compared with the same period last year, still maintaining a healthy level.
The cloud computing business maintained rapid growth, and the market share of third-party cloud management services in China further increased the revenue of cloud computing business by 32.3% to HK $1.46 billion compared with the same period last year, and the share of revenue increased by 0.6% to 3.8%. In addition to cloud resale, the company actively promotes the integrated development of sales and service, focuses on improving cloud lifecycle services and management, and takes advantage of its close cooperation with upstream vendors and its strong downstream coverage advantages to launch a series of cloud solutions. it is expected that more cloud services will be launched in the future, thus having the ability to provide diversified one-stop cloud products and services.
According to IDC, the company's cloud value-added services revenue increased by 56.5% year-on-year, and the market share of third-party cloud management services in China increased by 0.4 percentage points year-on-year to 4.2%, advancing one place to fifth.
The consumer electronics business is growing rapidly, and revenue from the consumer electronics business is expected to grow 14.8 per cent year-on-year to HK $16.11 billion in the future. The company accurately distributes online and offline omni-channel services, and actively expands new online channels, including Douyin and Kuaishou Technology. At present, there are more than 5000 offline channels in China, covering 30 provinces and cities across the country. Considering that the company has added more products during the epidemic, the consumer electronics business is expected to maintain rapid growth in the second half of the year as the epidemic alleviates and policies to stabilize economic growth are supported. As the company covers a wide range of electronic products, which can greatly meet the market demand, it is expected that the business will be able to maintain healthy growth for a long time.
Lower the target price to HK $8.50 and maintain the "buy" rating
Taking into account the increased performance, macro factors and financial expenses of 1H22, we downgrade our profit forecast. The net profit of 22E/23E/24E is 8.4% to HK $1.48 billion, respectively, from-7.8% to 1.78 billion, and the EPS of 22E/23E/24E is 0.85, 0.97 and 1.05 respectively. With reference to the current valuation and historical valuation of its main competitor, China Digital (000034CH), the valuation is scrolled to 8 times the 23-year target PE, with a corresponding reduction in the target price to HK $8.50, a potential increase of 60.4 per cent, maintaining the "buy" rating.
Risk tips: (1) macroeconomic impact; (2) intensified market competition; and (3) cloud computing expansion is not as expected.