Profits increased year-on-year, giving it a “buy” rating
The company released a performance forecast. Net profit for 23 years was 520-630 million yuan, up 173% ~ 231%; net profit from non-return to mother was 337-447 million yuan, up 92%-154%; 23Q4 net profit to mother was 0.94-204 million yuan, up 516%-1235%, -44%-22% month-on-month, minus 0.43%-153 million yuan, same increase of 39%-394%, year-on-month growth rate of -60%-41% month-on-month. Non-recurring profit and loss in 23 years affected current profit of 188 million yuan, mainly financial management income, government subsidies, and investment income of 54 million yuan obtained from the sale of 88% shares in the Russian subsidiary CDN-VIDEOLLC. EPS is expected to be 0.24/0.26/0.32 yuan in 23-25 years. Comparable to the company's 24E average PE 46.5x (iFind), the 24-year average PE is 46.5xPE, and the target price is 11.95 yuan. Considering the release of overseas demand or driving continued profit growth, it was raised to a “buy” rating.
The profitability of 23Q1-Q3 continues to increase, and the net profit deducted in the 23Q1/23Q2/23Q3 quarter was 0.35/1.51/108 million yuan, respectively, and the median value in the 23Q4 forecast range was 98 million yuan. According to the three-quarter report, the equity incentive cost that should be confirmed in 23Q4 is 0.24 million yuan. If the equity incentive fee is restored to the median value of the forecast range, the non-net profit deducted after the 23Q3/23Q4 reduction is 1.15/122 million yuan, which is expected to improve month-on-month in 23Q4. In terms of driving factors, 23Q1-Q3's gross profit margin was 30.7%, an increase of 5.7pct. Profitability increased significantly year-on-year, and became an important driving force for high performance growth. The gross profit margin for 23Q1/23Q2/23Q3 was 28.9%/30.7%/32.4%, and profitability continued to increase month-on-month in a single quarter.
Domestic competition is slowing down and overseas demand is being released, providing an impetus for profit growth. The company adopts a market strategy that balances revenue and profit in the domestic market to maintain the size of the business platform, improve operational efficiency, and promote the increase in domestic profits. As price competition among domestic CDN manufacturers gradually slows down, the gross margin of domestic business is expected to stabilize. Furthermore, the company is actively expanding overseas markets, and the share of overseas business revenue continues to increase. Following the “Belt and Road” development, the company continues to promote CDN, security, MSP, private/hybrid cloud and other businesses to go overseas, and the “circle of capabilities” for overseas business continues to expand. According to the company's official website, by the end of '23, Wangsu's global nodes covered 70+ countries and regions, cooperated with 200+ overseas operators, and had rich node route resources in Southeast Asia, Europe, America, and the Middle East. As demand from overseas regions represented by Southeast Asia is released, the company's profitability is expected to continue to rise.
Benefiting from increased profitability in the short to medium term, and focusing on innovative business development in the long term, we believe that the company is expected to continue to benefit from increased overseas traffic and slowing domestic price competition in the short term. In the long run, the innovative business is expected to open up a new growth curve. The company actively expands its business boundaries and has a good layout in edge computing, cloud security, zero trust, and liquid cooling technology. Furthermore, the company actively grasped the wave of new technology and launched an edge GPU computing power platform in August 2023. Based on globally distributed node resources, the company provides high-performance GPU computing power resources, significantly improving graphics processing and floating point computing capabilities. We believe that looking at the long-term development of innovative businesses will further open up room for growth for the company.
Risk warning: Overseas traffic growth falls short of expectations, and competition in the CDN industry deteriorates.