Description of the event

The company released the 2023 semi-annual report. During the reporting period, the company achieved operating income of 14.895 billion yuan, an increase of 5.16% over the previous year; realized net profit of 200 million yuan, an increase of 15.59% over the previous year; realized net profit of 197 million yuan, an increase of 23.27% over the previous year; and the parent company achieved net profit of 345 million yuan, an increase of 115.50% over the previous year.

Incident comments

Dragon is showing off, the company's performance continues to improve, and it is actively increasing investment in R&D. Company H1 achieved both growth in operating income and net profit, and its performance continued to improve. The company's gross margin was 20.88%, which is basically the same as the same period last year, demonstrating the company's stable operating capacity and market position. The company's net interest rate to parent was 1.34%, up 0.12 Pct year on year; net interest rate after deduction was 1.32%, up 0.19 Pct year on year. The company's profitability continues to improve, demonstrating good prospects. The net interest rate of the parent company was 3.21%, up 1.68 Pct from the previous year, and the traditional telecommunications business continued to improve. The company attaches importance to R&D investment. In '23, H1's R&D expenses were 1,888 million yuan, an increase of 10.05% over the previous year. Self-developed chips have achieved remarkable results, and the company's autonomous and controllable capabilities have been enhanced.

Extreme new growth: In the era of computing power, the company's server business is expected to benefit significantly. Computing and storage are growth businesses that the company has focused on building in recent years, seizing strategic opportunities for the development of computing power. In recent years, the compound annual growth rate has reached more than 50%. In terms of product technology, the company has widely cooperated with the most advanced suppliers in the industry and is leading the release of diverse computing power products and technologies such as X86 and ARM to achieve systematic layout and commercialization of basic computing power hardware. Launched a series of self-developed server products, completed technological breakthroughs in the entire chain of high-end liquid-cooled servers, commercialized self-developed high-end liquid-cooled servers, and achieved commercialization. The ratio of cold plate liquid cooling reached the leading level in the industry, and product applications covered various industries such as the Internet, operators, government, and finance. In H1 in '23, the company won the bid with the highest overall ranking in mobile server collection; the company's Xinchuang computing power made a breakthrough in the fields of finance, party, and government.

Two new growth points: breakthroughs in self-developed technology, and expansion of marine optical communication can be expected. The company has increased its investment in marine optical communications and has built an offshore cable production base. It has full business capabilities in submarine cables, marine optical communication equipment, engineering design and construction, and can provide EPC turnkey services. In the FitOcean marine network solution, the company has achieved a full range of self-research, from submarine cables, wet end equipment, and shore-end equipment to management, operation and maintenance software platforms, and has initially applied domestic and foreign cross-sea communication and marine monitoring network projects.

The traditional business is improving, and self-developed chips have achieved remarkable results. In the field of chips, the company has developed its own special chips for system equipment, advanced process design and core IP self-development capabilities that master core technologies such as signal processing and switching. The company has mastered independent optical fiber prefabricated rods and core optical fiber production processes, and has a stable position in the industry. In '23, H1 mobile optical cable collection ranked second, and both profit and share increased. Cooperate with operators to carry out verification of the 400G C+L multi-band ultra-long distance transmission system, complete the total length of 3820 KM of electric-free relay ultra-long distance optical transmission, and achieve the longest verification distance of the current network in the industry. China Mobile said it will launch 400G product collection by the end of this year to push 400G into the commercial stage. Firefight Communications, which has a forward-looking layout, is expected to benefit.

Profit prediction and investment suggestions: The company's performance continues to improve, actively increases investment in R&D, and has achieved remarkable results in self-developed chips. The new growth is very clear: the server subsidiary has fully benefited from the AI era and is expected to become the company's future growth business; Ocean Optical Communications has achieved a full range of self-research, and business expansion can be expected. Traditional business is improving: To achieve self-research on key special chips for system equipment, an increase in gross margin can be expected. The company's net profit for 2023-2025 is estimated to be 514, 7.41, and 1,030 million yuan, an increase of 27%, 44%, and 39% over the previous year. Corresponding to PE 39x, 27x, and 19x, key recommendations, and maintaining the “buy” rating.

Risk warning

1. Carrier transmission network Capex falls short of expectations;

2. The competitive landscape of the industry has deteriorated.