Key points of investment
2023H1's profit fell 2.78% year on year, but profitability began to improve half year on year. In 2023, H1's revenue was about RMB 8.45 billion, a year-on-year decrease of 15.7%; profit attributable to company owners was about 351 million yuan, a year-on-year decrease of 38.6%. If the decline in the company's revenue is due to a contraction in business demand from core major customers during the reporting period, it is also related to factors such as the company's strategic transformation and focus on developing high-value projects.
In terms of profitability, the company's gross margin in 2023H1 has rebounded to 23.7%, up 2.5 percentage points from 21.2% of H2 in 2022; the company's net profit margin is 4.2%, up 2.3 percentage points from 1.9% of H2 in 2022.
The return of Huawei phones is expected to help the cornerstone business recover steadily
The Mate 60 series of Huawei phones went on sale in September of this year. Huawei is expected to resume growth in the consumer electronics sector, which will help advance its “1+8+N” strategy in depth. The company is expected to benefit continuously and comprehensively from the business recovery of its core major customers.
New businesses such as Cloud Intelligence, Hongmeng Ecology, ERP, and AIGC build a second growth curve. The company uses the cloud intelligence business as the company's capability base to build a second revenue growth curve. The company binds 10% of HUAWEI CLOUD's capabilities; cooperates with Huawei's Pangu Grand Model and Baidu Wenxin in the AIGC field; and Hongmeng Ecology develops business such as application software migration. At the same time, the company is rapidly developing leading Internet customers, finance, and central government enterprises to achieve diversified development of the cornerstone business.
Maintain buy rating, target price HK$7.1 per share
We predict that the company's main business revenue from 2023 to 2025 will be 199.65 (-0.2%), 223.61 (+12%) and 257.2 (+15%) respectively, corresponding net profit of 9.04 (+19.1%), 10.6 (+17.3%), and 12.7 billion yuan (+19.3%), with an average profit growth rate of 18.5% over the three years.
We believe it is reasonable to give a valuation of 18.5 times the profit in 2024. The corresponding target share price is HK$7.1 per share, and there is room for 21.6% increase from the current price, maintaining the “buy” rating.