2023 results are largely in line with market expectations
The company announced its 23-year results: operating income +7.7% YoY to 1,093 billion yuan, main business revenue of 863.5 billion yuan, +6.3% YoY; net profit to mother +5.0% YoY to 131.8 billion yuan. Revenue and net profit performance are basically in line with market expectations. 4Q23 revenue was 233.7 billion yuan, +9.3% year on year; main business revenue was 198.9 billion yuan, +3.6% year on year; net profit to mother was 26.3 billion yuan, -2.5% year on year.
Development trends
Revenue in the individual and household markets grew steadily, and cloud revenue remained high. In 2023, revenue from the personal market, household market, government and enterprise market was +0.3/13.1/ 14.2% year-on-year to 4,902/1319/192.1 billion yuan, and mobile cloud revenue +65.6% year-on-year to 83.35 billion yuan. We are optimistic that the company will improve its self-developed product capabilities. We expect mobile cloud revenue to grow at a 30% year-on-year rate in '24.
R&D investment increased in 23 years, and profits were partly affected by return on investment. The company invested 28.7 billion yuan in R&D in 23 years, +58.7% year-on-year. We believe it is mainly due to increased investment in AI and other areas and increased remuneration incentives for R&D personnel. In investment income from joint ventures and joint ventures in '23, SPD Bank's contribution fell by 2.6 billion yuan year on year. Excluding this, which affected the company's net profit growth rate of about 7% in '23.
The decline in capital expenditure supported cash flow performance, and the structure continued to lean towards computing power. The company's operating cash flow in '23 was +8.2% YoY, and free cash flow was +29.2% YoY. The company expects capital expenditure to be -4.0% to 173 billion yuan in 2024, while the structure continues to lean towards computing power. We believe it is beneficial to the company's cash flow performance and provides support for the company's computing power construction and technological transformation.
Depreciation period adjustments and guidelines increase the dividend ratio to further enhance shareholders' dividend returns. The company announced that the depreciation period for 5G wireless and related transmission equipment will be adjusted from 7 years to 10 years starting January 1, 2024. We believe that: 1) the adjustment of the depreciation period is based on a more objective and fair reflection of the actual period of use of fixed assets; 2) the change in the company's estimate will reduce the depreciation of fixed assets by 18 billion yuan in 24 years, providing some support for the company's performance, but considering factors such as income tax impact and continued R&D investment, we expect a profit increase of less than 18 billion yuan in 24 years; 3) the company's three-year cash dividend ratio will increase to more than 75%. We believe that shareholders' dividend returns will be further boosted. (See text for details) Profit forecasting and valuation
Considering the slowdown in revenue growth and the impact on investment income due to the impact of the external environment, we lowered 24E A-share revenue/net profit of 3.6% to 10,796/143.6 billion yuan; lowered the net profit of Hong Kong stock 24E by 3.7% to 143.6 billion yuan, and introduced a 25-year net profit forecast of 1536/153.6 billion yuan for the first time. The current A share price corresponds to 15.3/14.3 times the price-earnings ratio in 2024/25. The current Hong Kong stock price corresponds to the 2024/25 price-earnings ratio of 8.9/7.9 times. Using the 24E SOTP valuation method, A shares maintained an outperforming industry rating and a target price of 110.0 yuan, which corresponds to a price-earnings ratio of 16.4/15.3 times 2024/25, with 7.1% upside compared to the current stock price. Hong Kong stocks maintained an outperforming industry rating and a target price of HK$85.00, corresponding to 11.3/10.1 times the 2024/25 price-earnings ratio, with 27.2% upside compared to the current stock price.
risks
Competition in the cloud computing market has intensified, and the profit level of government and enterprise services falls short of expectations.