Incident review
The company's semi-annual report for 2023 shows that in the first half of 2023, it achieved operating income of 1,023 million yuan, a year-on-year decrease of 8.97%, net profit of 49 million yuan, a year-on-year decrease of 43.56%, after deducting net profit of 24 million yuan, a year-on-year decline of 48.75%. Looking at a single quarter, 2023 Q2 achieved revenue of 580 million yuan, a year-on-year decline of nearly 20%, a year-on-year increase of about 30%, and net profit of 31 million yuan, a year-on-year decline of about 50%, and a sharp increase over the previous year. In the context of slow macroeconomic recovery, demand from the company's automotive industry customers and overseas markets continues to maintain a strong growth trend, but demand from traditional IoT industry customers and FWA customers is still weak.
The multi-modal large model calls for high-efficiency edge computing power with low latency. The company's computing power module accelerates penetration. With the rapid development of diffusion models such as Stable Diffusion and the open source of SAM's high-quality data sets and graphics tools, AIGC traffic such as images, video, and VR may explode in the future. Future interactions with industrial twin worlds and AI NPCs require low latency and high reliability. Applications such as the industrial Internet and smart coal mines require no traffic leaving the park, calling for localized deployment of computing power. The computing power module is a product line of the company's intelligent modules. The company proactively invested in AI computing power-related research and development, and officially released the computing power module products in early 2022 and commercialized them in large quantities. The company's computing power module can currently provide up to 48 TOPS of AI computing power. It was initially applied to cloud servers, drones, industrial vision inspection and other related scenarios. Currently, it is gradually expanding into new fields such as AI retail, VR glasses, AI-boxes, digital humans, edge side terminals, etc. In the future, shipments of industrial gateways, service/humanoid robots, wireless security, etc. with computing power modules will increase rapidly.
The company continues to increase R&D and market investment. The 3+3 pattern is for developing an array of energy storage products in the medium to long term. The company lays out three product forms: intelligent modules, computing power modules, and digital transmission modules, each with advantages and balanced development. Among them, the computing power module supports the Stable Diffusion large model for the first time. In terms of business structure, the company focuses on the three major application areas of intelligent connected vehicles, FWA, and traditional IoT. Each has its own focus and collaborative development. Among them, the intelligent connected vehicle business has more than doubled; the FWA business is affected by changes in overseas operators' market demand and customer structure, etc., and overall demand has weakened, but the company continues to break through with major customers in Europe, North America, and Japan; in the traditional IoT industry, overall demand is still weak in the context of a weak recovery in the global economy. Focusing on the future, the company continued to increase R&D investment during the market downturn. R&D expenses increased 15.19% over the same period last year. At the same time, it also actively explored overseas markets. Sales expenses increased 48.47% over the same period last year, and the share of overseas market revenue increased to 31.06%. The company's gross margin increased by 2.51 percentage points over the same period last year due to the increase in the share of shipments of automotive, high computing power, and high-margin products from overseas customers.
Investment advice
The company focuses on intelligence/computing power modules and solutions, and is deeply involved in the automotive, FWA and pan-IoT fields. Over the years, Huawei has a rich technical heritage and excellent customer resource endowments. Under the resilience of overseas demand for the Internet of Things and the resurgence of domestic consumption, the growth of the company's automotive business is highly certain, and the profitability of FWA and IoT businesses is steadily increasing. Considering that the intensity of macroeconomic recovery fell short of expectations, we adjusted the company's net profit forecasts for 2023-2025 to 142, 2.25 million yuan, and 355 million yuan respectively, corresponding EPS to 0.54, 0.86, and 1.36 yuan, respectively. The current stock price corresponding to PE in 2023-2025 is 51.66X/32.70X/20.68X, respectively. Maintain a “buy” rating.
Risk warning
1) Overseas demand is weak, and domestic economic recovery falls short of expectations; 2) Vehicle business growth falls short of expectations.