Incident: On August 25, 2023, the company released its 2023 semi-annual report. 23H1 achieved revenue of 4.831 billion yuan, an increase of 6.82% over the previous year; achieved net profit of 140 million yuan, a year-on-year decrease of 46.39%.
Network devices and cloud desktops are growing steadily, and net profit is under pressure in the short term.
23H1 network device revenue was 3.6 billion yuan, up 9.0% year on year; cloud desktop revenue was 270 million yuan, up 11.8% year on year; and network security revenue was 3.9 billion yuan, up 1.3% year on year. Short-term pressure on the company's profits is mainly due to the increase in management and R&D expenses brought about by the expansion of the company's business scale.
Investment in R&D has been increased, and many new products have been released one after another.
23H1's comprehensive gross margin was 39.33%, up 2.39 pct year on year; net profit margin was 2.89%, down 2.87 pct year on year; company 23H1's R&D/sales/management expenses ratio was 19.57%/15.15%/4.85%, year-on-year change +1.19pct/+0.72pct/+3.33pct, and the company continued to increase R&D investment. The company has launched a number of innovative product solutions, including “three networks, one center, one cloud, one classroom”: (1) network equipment: in the data center field, the AI Fabric intelligent computing center network solution including various core products; in the field of park networks, the simplified Ethernet all-optical solution continues to advance to the 3.0 stage; in the field of wireless products, it has released the Starry Sky Wireless 3.0 solution; and launched a new Wi-Fi 7 AP to provide users with higher speed, lower latency and more reliable wireless connectivity and smarter operation and maintenance management services. (2) Network security: A new generation of firewall products has been introduced, using three major designs: intelligent outbound security, intelligent policy manager, and intelligent cloud empowerment, with stronger security protection capabilities; cybersecurity solutions for airports, high-speed, and medical fields have been introduced.
(3) Cloud desktop: The Tri-Engine 2.0 cloud desktop solution was launched, bringing a new user experience through a high-performance and cost-effective GPU; for the education sector, a new generation of smart classroom solutions was launched, and a 5G integration+teaching network construction model was deployed to lead the new trend in industry development.
Multiple products continue to lead the market, and overseas deployment is accelerating.
The company's market position for switches, wireless, cloud desktops and other products continues to be consolidated. According to IDC, 23Q1 ranked third in China's Ethernet switch market share, third in China's data center switch market share, and second in China's enterprise-level WLAN market share, with Wi-Fi 6 product shipments ranking first. In 23Q1, the market share of the company's data center switches in the Chinese operator industry increased from 17.3% in the same period last year to 24.2%. At the same time, the company has made new progress in expanding overseas markets. 23H1 Overseas business sales revenue was 488 million yuan, an increase of 16.36% over the previous year. The company has set up subsidiaries in Hong Kong, Thailand, and the United Kingdom, and the scope of overseas business has expanded to more than 70 countries and regions including Asia, Europe, America, and Africa.
Investment advice: The AI wave is driving the acceleration of digital infrastructure construction. As an ICT infrastructure leader, the company is expected to fully benefit. We expect the company's net profit to be 742 million yuan/984 million yuan/1,163 million yuan respectively in 23-25, and the PE corresponding to the current market value is 32x/24x/20x. Maintain the “Recommended” rating.
Risk warning: Demand for ICT equipment falls short of expectations; market competition intensifies.