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Investment advice
Wangsu Technology's 1H23 performance: revenue was 2.33 billion yuan, down 8.2% year on year, net profit to mother was 260 million yuan, up 196.9% year on year, net profit after deducting 190 million yuan, up 166.7% year on year; in a single second quarter, revenue of 1.16 billion yuan, down 11.0% year on year, down 0.9% month on month, net profit of 160 million yuan, up 361.3% year on year and 72.1% month on month, in line with market expectations. As the company's fundamentals continue to improve, the addition of the company's new business (liquid cooling, edge computing) is expected to increase performance, raising the neutral rating to outperform the industry rating.
The gross margin has been rising steadily. At the product level, 1H23's IDC, liquid cooling/CDN, and edge computing/product sales revenue was +0.9%/-9.0%/+25.2%, respectively, to 130 million yuan/2.17 billion yuan/31.97 million yuan.
At the gross margin level, 1H23's overall gross margin increased by 6.6ppt to 29.8% year on year, CDN and edge computing/product sales gross margin increased 7.2/2.7ppt to 30.4%/28.4%, respectively, and IDC and liquid-cooled gross margin decreased by 3.7 ppt to 20.1% year on year. The gross margin for the second quarter increased by 8.4 ppt to 30.7% year on year, and 1.9 ppt month on month.
Net profit and operating cash flow improved significantly. 1H23 net return interest rate increased 7.7ppt to 11.1% year on year, 2Q23 return net interest rate increased 11.4ppt to 14.1% year on year, up 6.0 ppt month on month. At the cost level, 1H23's three fees (sales, R&D, and management) increased 11.5% year on year to 600 million yuan; sales/R&D/management expenses respectively +19.8%/-2.7%/+27.9% to 2.1/2.7%/+27.9% to 2.1/2.4/160 million yuan; 2Q23 total fees increased 22.8% year on year to 301 million yuan, and sales/R&D/management expenses increased by +31.8%/+3.5%/+49.3% to 110 million yuan/120 million yuan/85.6 million yuan, respectively. Operating cash flow 1H23 increased 292.2% year on year to 4.1 billion yuan, and increased 175.2% year on year to 350 million yuan for the second quarter, up 558.2% month on month.
The announcement of an equity incentive plan shows confidence in steady profit growth. The company announced the 2023 restricted stock incentive plan (draft). The incentive plan plans to grant a total of 32 million restricted shares to incentive recipients (250 people in total), accounting for 1.3% of the company's total share capital at the time the incentive plan was announced. The grant price was 3.37 yuan per share. The performance assessment goals are: net profit for the first vesting period 2023 is not less than 300 million yuan, and the total net profit for the second vesting period 2023 and 2024 is not less than 6.1 billion yuan. According to the company's announcement, assuming that the company grants restricted shares to the incentive target in September 2023, the company expects a total cost of about 100 million yuan, and amortization expenses of 1904/6,360/19.44 million yuan respectively from 2023-2025.
Profit forecasting and valuation
We kept our 2023/2024 revenue forecast unchanged. Due to improvements in the company's profitability, we raised our 2023/2024 net profit by 3.7% to 300 million yuan, and basically kept our 2024 net profit forecast unchanged. The current stock price corresponds to 57.5/43.4 times P/E in 2023/2024. As the company's fundamentals continue to improve, the superposition of the company's new business (liquid cooling, edge computing) is expected to increase performance, raise the neutral rating to outperform the industry rating, maintain a target price of 9.4 yuan, corresponding to 57.6 times P/E in 2024, with 32.8% upside from the current stock price.
risks
Competition in the CDN market has intensified, and new business development has fallen short of expectations.