Leading in intelligent home manufacturing equipment, IDC and cloud businesses urgently need to be re-evaluated. The company was founded in 1996 and is mainly engaged in the development and production of intelligent household manufacturing equipment and intelligent production lines. It has now grown into a leading enterprise in domestic panel home production equipment. In 2018, the company acquired the only network of leading digital economy service providers in China, and further expanded its business to digital services such as IDC, cloud computing, and cloud networking. Since its development, a dual-track parallel business model of intelligent manufacturing+IDC and cloud services has been formed.

In 2022, the company achieved operating income of 2,960 billion yuan, +6.61% year-on-year; net profit of 290 million yuan, -0.35%; 2023Q1-Q3, the company achieved operating income of 2,680 million yuan, +27.56%; and net profit of 236 million yuan, +17.22% year-on-year. Among revenue in 2022, the revenue of IDC and cloud services and equipment was $1,552 million and $1,558 million respectively, while the revenue of IDC and cloud services from 2018 to 2022 reached 57.83%. The total revenue of Aofei Data and Data Port during the same period was $1,097 million and $1,455 million respectively.

IDC and cloud services: AIGC drives improvements in IDC supply and demand, and AI cloud services accelerate the growth curve. The company's IDC and cloud business is carried out by the sole network of its subsidiaries. The main business scope includes IDC, cloud computing, cloud networking and digital solutions industries. In 2022, the company's IDC business (including cloud computing, etc.) achieved revenue of 1,452 billion yuan, and CGAR's revenue from 2018 to 2022 reached 57.83%. 1) AI applications: Jointly with Microsoft to create AIGC application solutions to empower thousands of industries. The company recently launched a joint innovation with Microsoft to provide industry customers with AIGC application products and solutions. Considering that Microsoft and Openai are in the leading position in the world in terms of model side and application implementation capabilities, the related product Xiaolu AIGC Intelligent Assistant has now been launched, and it is expected to form a new performance growth point in the future. 2) IDC: With the triple support of favorable policies, boosted demand, and technology iteration, the industry has entered a period of rapid development. With the orderly progress of “East numbers and West calculations,” the IDC construction and operation industry is expected to prioritize profits in the short term. At present, the company's IDC business has covered the entire life cycle of data center use. It also has two self-built data centers, Zhixiang (South China) and Shatin, Dongguan, and data center nodes covering more than 40 cities in China in total. It is expected to rely on its share advantage to take the lead. At the same time, the booming development of industries such as AI and big data will further boost the demand for data center usage. According to the forecast of the Tongtong Digital Infrastructure Industry Research Institute, the scale of data center racks in China will grow to 14 million in 2025, and the total scale will more than triple compared to 2021. Furthermore, the country's first multi-heterogeneous computing power scheduling platform launched in June of this year has broken the heterogeneous computing power problem that has limited the development of the industry for a long time, and will also have a positive effect on future IDC industry demand; 3) AI cloud: model training boosts short-term computing power prosperity, and releases the pace of reasoning computing power demand in the medium term. At the beginning of 2023, with the catalysis of large overseas models, the number of artificial intelligence models and parameters at home and abroad grew rapidly, the speed of iteration accelerated, and the demand for computing power on the model training side rose rapidly.

Computing power hardware is in short supply, and there are obvious price increases and extended delivery times. Considering that artificial intelligence models are still rapidly iterating, short-term computing power demand is expected to remain strong until the end of 2023. In the medium to long term, as large models mature, numbers will also converge, and model reasoning will contribute to greater computing power requirements. The pace of release of computational power requirements requires close tracking in multiple dimensions.

Home manufacturing: The industry still has room for growth, focusing on vast stocks to improve demand. The home furnishing industry is highly correlated with the real estate cycle. In recent years, it has been affected by macroeconomic and policy tightening, and the overall development of the industry is under pressure. The company's corresponding business growth rate has slowed. In 2022, the company's household special equipment business achieved revenue of 1,508 billion yuan, -4.51% over the same period last year. Currently, with the release of positive signals from the “three major projects,” the industry is expected to gradually recover in the future. At the same time, according to iResearch's statistics, the initial renovation of newly purchased rough houses currently only accounts for 44.7% of the total demand in the decoration market, and the main demand for decoration in the future may gradually shift to existing real estate. Combined with the aging trend, the rigid demand for age-appropriate decoration products has boosted. As an industry leader, the company is expected to take the lead in benefiting from the new industrial pattern.

Profit forecast and investment recommendations: We expect the company's total revenue for 2023-2025 to be 37.71/46.83/5.789 billion yuan, up 27.38%/24.19%/23.62% year on year; net profit of 4.13/506/633 billion yuan, up 42.30%/22.37%/25.25% year on year. The corresponding EPS is 1.40/1.71/2.14 yuan, corresponding to PE 12/10/8. First coverage, giving an investment rating of “Highly Recommended”.

Risk warning: macroeconomic recovery falls short of expectations, risk of increased competition in the IDC industry, risk of earnings forecasts falling short of expectations