Incident summary: Telecom Digital released the 2023 semi-annual report on August 25. The company achieved operating income of 4.259 billion yuan in the first half of 2023, up 0.87% year on year; realized net profit attributable to shareholders of listed companies was 132 million yuan, down 4.87% year on year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 129 million yuan, down 18.56% year on year. The basic earnings per share was 0.1920 yuan/share.

The core capabilities of digital products continue to improve, and the business is growing steadily. During the reporting period, the company's digital product business revenue was 140 million yuan, up 193.91% year on year, and gross profit increased 291.67% year on year. It mainly stems from the company's insistence on being innovation-driven, focusing on technical directions such as artificial intelligence, big data analysis, digital engines, big models, and industry numerical intelligence, and continuing to invest in independent product research and development. Furthermore, due to the downward pressure on the economy and insufficient supply and demand, the industry's digital business revenue was 3,811 billion yuan, down 2.54% year on year, gross profit increased 8.30% year on year, and gross margin increased 1.80 percentage points year on year. The positive impact of the company's focus on data center engineering business and actively developing IDC's operations led to revenue of 322 million yuan in the new digital infrastructure sector, an increase of 12.29% over the previous year.

Expense rates are well controlled, and R&D is expected to expand further. According to the 2023 semi-annual report, the company's sales expenses and management expenses for the first half of 2023 were 357 million yuan and 106 million yuan respectively, up 24.60% and 14.36% year-on-year. This was mainly due to the expansion of the company's business scale and personnel growth, as well as increased investment in employee remuneration, and corresponding increases.

The company invested 213 million dollars in R&D during the reporting period, an increase of 5.45% over the previous year. The company focuses on developing AI intelligent inference module hardware products, building digital twin engine software products, developing data value insight analysis platform software products, and creating big model products “smart games”, securities and futures high-speed trading service platform software products, and bank data center operation platform software products.

Xinchuang's localization projects are expanding rapidly, and the Xinchuang industrial ecosystem is gradually being built. The company continues to deepen cooperation with key vendors such as Xinchuang and localization, and provides related services such as solution consulting and certification, product adaptation optimization, technology promotion and training, and open source software governance. During the reporting period, the scale of cooperation between the company and leading localized vendors was in the leading position in the industry, and industry credit and innovation signatures increased by about 71% over the same period last year. The company has jointly built a joint innovation laboratory with industry customers such as the Shanghai Stock Exchange and Shanghai Unicom; it focuses on promoting financial innovation, stable operation of laboratories authorized by the Financial Innovation and Innovation Ecology Laboratory of the People's Bank of China, and has successfully implemented the Bank of Communications's open source governance platform. In addition, the company successfully implemented large-scale innovation benchmarking applications such as 249 million yuan from the Second Civil Aviation Institute; actively built its own credit innovation products, and the data value insight analysis platform software product “dVinSight” obtained the Xinchuang Product Evaluation Certificate issued by the Shanghai Soft Association Innovation and Innovation Industry Committee.

Investment suggestions: The company focuses on the new strategic position of “building a leading enterprise in overall digital solutions in the industry”, leverages the value of data elements, empowers business intelligence, and constructs diverse smart application scenario solutions. It has made breakthroughs in key industries such as finance, transportation, water conservancy, medical care, and manufacturing. It is estimated that the company's operating income for 2023-2025 will be 109.30, 125.87 billion yuan, and 14.552 billion yuan respectively; net profit to the parent will be 593, 702, and 836 million yuan respectively, corresponding to PE 24, 20, and 17 times higher, maintaining the “recommended” rating.

Risk warning: Macroeconomics affects downstream demand, Xinchuang's business falls short of expectations, and product innovation risks.