3Q23 performance is lower than we expected.
Star net Ruijie announced the third quarterly report of 2023: in the first three quarters, the company achieved operating income of 11.052 billion yuan, an increase of 2.16% over the same period last year; net profit of 303 million yuan, down 45.07% from the same period last year; and 238 million yuan of non-net profit, down 52.76% from the same period last year. Corresponding to the single quarter of 3Q23, the company achieved revenue of 4.083 billion yuan, down 0.99% from the same period last year, up 12.88% from the same period last year; the net profit from its mother was 105 million yuan, down 56.38% from the same period last year and 10.95% from the previous year; and deducting 100 million yuan from non-net profit, down 53.84% from the same period last year. 3Q23 performance is lower than we expected. We believe that it is mainly due to the weaker-than-expected recovery of downstream Internet, government and enterprise customer demand, as well as the increase in the size of the company's staff, and the cost control measures have not yet fully taken effect. 3Q23 sales / management / R & D expense rates increased to 12.7%, 4.8% and 16.6%, respectively, compared with the same period last year.
Trend of development
The leading position of the network equipment industry is solid, and the switch continues to evolve to high speed. According to IDC,2Q23, the market size of Ethernet switches in China was US $1.44 billion, down 8% from the same period last year and an increase of 35% compared with the same period last year. Among them, the shipments of Ruijie network switches fell 18% from the same period last year, up 17% from the same period last year, ranking third in China in market share. In addition to the switch, according to IDC, Ruijie Wireless also ranks third in the wireless WLAN market share, leading the market segments in services, education and communications. In terms of sub-port rate, the sales of Ruijie 200G/400G port is growing rapidly. IDC data show that the sales of 2Q23 Ruijie 200G/400G port is 51 million US dollars, which has more than doubled compared with the previous year, accounting for 29.45% of the total sales of Ruijie switch port. The growth rate and sales percentage are higher than those of other speed products. We believe that the trend of high-speed evolution of data center switches is clear, 400G is expected to become a mainstream port, and the increase in the proportion of high-value products is expected to boost the company's profitability.
Actively participate in the construction of all-optical network, empower the digital transformation of thousands of lines of industry. Centering on F5G and F6G technological innovation, Starnet Ruijie continues to promote the construction of a high-quality all-optical base with the integration of "United family + joint enterprise + online". At the 2023 China Mobile Limited Global Partnership Conference, it exhibited innovative products and all-optical solutions in backbone digital couplet, metro access, converged access, FTTX and other fields, comprehensively promoting digitization.
A number of network terminal products continue to take the lead. The thin client and cloud terminal products of subsidiary Shengteng Information firmly occupy a leading position in the market. According to IDC,1H23 Shengteng, it ranks first in Asia Pacific thin client market, first in Chinese thin client market, and ranks first in domestic market share of TCI cloud terminal and VDI cloud terminal.
Profit forecast and valuation
Considering that the recovery of downstream Internet and corporate network demand is weaker than expected this year, and the company has more expenses in the fourth quarter of the historical year, we have lowered our 2023 profit forecast by 26% to 393 million yuan, basically maintaining the 2024 profit forecast of 678 million yuan. The current share price corresponds to the 2023 Universe 24-year 27.3 Placement 15.8 times Pax E. To maintain the outperform industry rating, we switch the valuation window to 2024, and maintain the target price of 20.5 yuan, corresponding to 13.5% upside space, based on the 2024 18 times Ppace E.
Risk
The procurement of domestic telecom and Datong market is not as expected; the recovery of customer demand in government and enterprise industries is not as expected.