Investment highlights
Covering Ruijie Network (301165) for the first time, it gave it an outperforming industry rating. The target price is 48.60 yuan. Based on the P/E valuation method, the corresponding P/E in 2024 is 40 times higher. The company has been rooted in the network equipment industry for more than 20 years and is a leading ICT infrastructure and solution provider in China. We are optimistic that the company has keen insight and grasps industry needs. With leading sales capabilities, rapid scenario innovation and R&D capabilities, the company has benefited from AIGC's development wave and ushered in a new round of growth. The reasons are as follows:
Driven by the AI wave and the digital economy, ICT equipment is welcoming the development trend. Since the second half of 2022, the country has introduced several policies to consolidate the foundation of the digital economy, domestic and foreign technology companies are actively deploying artificial intelligence, and the trend of expanding and upgrading ICT equipment such as switches and servers is clear. We have seen that operators' investment focus continues to lean towards computing power networks. Although the capital expenditure of Internet vendors fluctuates in the short term, we expect that with the accelerated implementation of AI applications, the continued investment of cloud vendors in AI-related fields is expected to drive demand for ICT computing infrastructure to maintain a high level of prosperity.
Actively grasp the trend of white-boxing and acceleration, and accelerate penetration into the data center scenarios of cloud vendors and operators.
White box switches with software and hardware decoupling have the advantages of low cost, high openness, and easy unified deployment, and are favored by data center customers. The company's white box switches continue to penetrate major domestic manufacturers such as Ali and Tencent, as well as domestic operators such as China Mobile, and the market share of cloud vendors and operators in the data center switch market continues to rise. In order to adapt to the rising trend of data traffic brought about by AI and digital construction, the company's data center switch port speed continues to iterate at a high speed, and actively lays out Ethernet-based AI intelligence center network solutions. We believe that the 400G port is expected to become the company's mainstream shipping port in 2024, contributing important impetus to the company's performance growth.
Channel sales capabilities are outstanding, and SMB and overseas markets are showing growth momentum. 1) SMB: The company enhances the overall effectiveness of SMB dealers through efficient SMB channel construction and management, and creates a leading cloud platform to empower micro, small and medium-sized users. We believe that the company's SMB series product revenue is expected to continue to grow rapidly; 2) Overseas: The company approved the establishment of 12 overseas subsidiaries in early 2023. We believe that with mature leading products proven in the domestic market and innovative R&D for overseas business, the company is expected to open up vast overseas space, driven by the construction of an overseas business support system.
What is our biggest difference from the market? The market believes that Ruijie is facing intense market competition. We believe that the characteristics of high barriers in the network equipment industry have led to a scarcity of high-quality brands. Ruijie forms differential competition with friends and merchants. It has outstanding advantages in the Internet, SMB, education, medical, etc., and its share in traditional advantage zones such as operators and enterprise networks is also rising steadily. We believe that the overall competitive pattern of network equipment is relatively stable.
Potential catalysts: Domestic intelligent computing construction accelerates, AIGC application development exceeds expectations, and performance recovery exceeds expectations.
Profit forecasting and valuation
We expect the company's EPS for 2023/2024/2025 to be 0.68 yuan, 1.21 yuan, and 1.76 yuan, respectively, and the CAGR for 23-25 is 61%. The current stock price corresponds to 30.8 times P/E in 2024. It covered Ruijie Network for the first time and gave it a rating that outperformed the industry. Using the P/E valuation method, the target price was 48.6 yuan based on 40 times P/E in 2024, which is 30% higher than the current stock price.
risks
Competition in the industry is increasing; Data center/campus switch revenue falls short of expectations; and trade friction is increasing risk.