2023 revenue and net profit meet our expectations
The company announced its 2023 annual results: operating income of 148.62 billion yuan, +5.6% year on year; net profit to mother of 3.58 billion yuan, +6.7% year over year. Revenue and net profit performance to mother are in line with our expectations. In the semi-annual situation, 2H23's revenue was 75.45 billion yuan, +5.5% year-on-year, and net profit to mother was 1.55 billion yuan, +6.0% year-on-year.
Development trends
Seize strategic emerging business development opportunities, and each customer's market revenue is growing well. By customer market, revenue from operators, attracted customers, and overseas markets in 2023 was +4.7/6.3/ 15.3% year-on-year, respectively, reaching 817/634/3.5 billion yuan. Among them: 1) In the customer attraction market, the company focused on strategic emerging businesses such as industrial digitalization and photovoltaic energy. The number of new contracts signed in the customer attraction market increased by about 8% year over year to 87 billion yuan, of which new contracts for strategic emerging business increased by about 19% year on year. 2) In the operator market, the company seized opportunities for computing power development. Intelligent computing centers, smart cities, etc. drove the operator market to sign new contracts by about 8% year-on-year. By business: TIS/BPO/ACO business revenue was +4.4/1.1/16.8% year-on-year to 761/436/28.9 billion yuan, respectively. The amount of new contracts signed for strategic emerging businesses in 2023 was 59 billion yuan, +31% year-on-year, accounting for nearly 30% of the total number of new contracts signed +6ppt.
Project control is strict, gross profit continues to increase, and business quality continues to improve. Operating costs in 2023 were +5.3% year-on-year to 131.4 billion yuan, and gross margin increased by 0.2ppt to 11.6% year over year. The company continued to strengthen cost control and optimize revenue structures, and gross margins in all customer markets showed a positive trend. The annual R&D expenses were about 5.6 billion yuan, +12% year over year, mainly invested in key areas such as digital infrastructure and industrial digitalization.
In 2023, the company's ROE was +0.1ppt to 8.6% year-on-year, and operating efficiency continued to improve.
Cash flow from operating activities performed well, and the dividend ratio increased to 42%, increasing shareholder returns. In 2023, the company's net cash flow from operating activities increased 9.1% year on year to 5.356 billion yuan, and capital expenditure increased 35.1% year on year to 1,245 billion yuan, mainly due to the purchase of a number of submarine cable construction and maintenance facilities in 2023.
The company's free cash flow in 2023 was -0.5% year-on-year to $4.33 billion, mainly due to increased capital expenditure. The company announced that it will increase the dividend ratio to 42% in 2023, an increase of 2ppt over the previous year, and continue to improve dividend returns. We believe that the company strictly controls repayments, controls profit quality, and increases the dividend ratio. We believe it is expected to contribute good returns to investors.
Profit forecasting and valuation
We kept the company's profit forecast for 2024 basically unchanged, and introduced the 2025 net profit forecast of 3,961 billion yuan for the first time. The current stock price corresponds to the 2024/2025 price-earnings ratio of 5.8x/5.3x. Maintaining an industry rating and a target price of HK$4.70, corresponding to 7.7 times the price-earnings ratio of 2024 and 7.0 times the price-earnings ratio of 2025, with 31.7% upside compared to the current stock price.
risks
The impact of fluctuations in downstream demand exceeded expectations; the company's cost control fell short of expectations.