Incident: The company released its 2023 annual report, achieving annual revenue of 15.908 billion yuan, an increase of 1.06% year on year; net profit attributable to shareholders of listed companies was 425 million yuan, a year-on-year decrease of 26.36%.

Comment:

The company's performance was under pressure in '23, mainly due to weak downstream demand and an increase in the cost ratio during the period: the company's revenue and profit were under pressure in '23, mainly due to lower macroeconomic recovery than expected, weak market demand, and tight customer procurement capital; at the same time, the company's gross margin declined slightly and the cost ratio increased. The company's consolidated gross margin in '23 was 36.26%, a year-on-year decrease of 0.32pct. By business, network terminals/enterprise-grade network equipment/communication products/other products achieved revenue of 967 million/10.541 million/2,208 billion yuan, up 5.36%/0.94%/7.44%/8.27%; product gross margins were 21.07%/42.63%/19.19%/28.68%, respectively, a decrease of 4.25 pct/ a decrease of 0.39 pct/ an increase of 2.22 pcts.

The company's investment in management and R&D was further increased. The sales/management/R&D/finance expenses ratio was 13.91%/4.88%/16.74%/0.00%, respectively, an increase of 0.07pct/0.67pct/1.01pct/0.24pct over the previous year.

Ruijie's network switch market share remains third, and AI intelligent computing center network solutions were launched: in 2023, the subsidiary Ruijie Network achieved operating revenue of 11.542 billion yuan, an increase of 1.9% year on year; net profit of 401 million yuan, down 27% year on year, mainly due to weak customer demand in the Internet, government and enterprise industries, and maintaining high R&D investment. According to IDC data, in 2023, Ruijie Network ranked third in the Chinese switch market, data center switch market, and park switch market; ranked first in Wi-Fi 6 product category shipments and overall WLAN product shipments; ranked first in the local computing cloud terminal market share in China; and ranked first in the IDV cloud desktop market share for 3 consecutive years (2021-2023). Facing the construction of an intelligent computing center network for next-generation AI cloud services, the company released the AI-FlexiForce intelligent computing center network solution, which has various unique advantages such as full-scenario application, load balancing, and microsecond hardware self-healing. The bandwidth utilization rate is 97%, and it can support large-scale three-level networking to help users build intensive and efficient intelligent computing centers. We believe that as the construction of domestic intelligent computing centers enters the fast track, the company's smart network business will achieve rapid growth.

Profit forecast, valuation and rating: Considering that the growth of company management and R&D expenses has exceeded expectations, and that the current market demand recovery trend is relatively flat, the 24-25 net profit forecast was lowered from 797/856 million yuan to 614/836 million yuan, an adjustment of -23%/-2%, and the net profit forecast for 26 years was 1,072 billion yuan, corresponding to PE of 16X/12X/9X. We are optimistic about the development opportunities brought to the company by the AI Intelligence Center network trend, and the impact of operator computing power investment on white exchange demand in data centers , maintaining a “buy” rating.

Risk warning: Downstream demand falls short of expectations; market competition intensifies; weakening growth has led to a downward shift in the long-term valuation center.