Incident: The company released its 2023 annual report, which achieved revenue of 11.542 billion yuan, +1.9% year on year; realized net profit of 401 million yuan, -27.26% year on year; net profit after deducting non-return to mother was 351 million yuan, -29.17% year on year; of these, single Q4 achieved revenue of 3,591 million yuan, net profit to mother of 122 million yuan, +374.6% year on year.
Short-term performance is under pressure, leading the market share of network devices and cloud desktops. In 2023, the company achieved net profit of 401 million yuan, -27.26% over the same period. Short-term performance pressure was mainly due to sluggish downstream demand compounded by the expansion of the company's business scale, increased management expenses, and increased R&D investment. By business, in 2023, the company's network equipment/network security/cloud desktop products achieved revenue of 84/8.6/760 million yuan respectively, with year-on-year changes of -0.87%/-1.29%/+2.71%, respectively. Relying on continuous R&D and market expansion, the company maintains market leadership in various fields such as switches, wireless products, and cloud desktops. According to IDC statistics, in 2023, the company's park switch market share ranked first in the domestic education and distribution industry; the data center switch market share ranked second in the domestic Internet industry; and the WLAN product market share ranked first in the domestic Internet, education, communications, and service industries.
AIGC brings new demand, and profitability is expected to increase. On the profit side, the company's comprehensive gross margin was 38.94% in 2023, or -0.72% compared to the same period, which remained stable. With the surge in computing power brought by AIGC and the increase in the share of high-speed switch shipments, the company's profitability is expected to increase steadily in the future. In terms of cost ratio, the company's sales expense rate/R&D expense rate/management expense ratio in 2023 were 15.35%/18.94%/4.9%, respectively, with year-on-year changes of -0.47/+0.91/0.77pp, respectively. This is mainly due to the expansion of the company's business scale and increase in expenditure. The company has achieved remarkable results in R&D and innovation. By the end of 2023, the company had 1,412 patents, including 1,326 invention patents, and 151 new patents were added during the period.
Deepen product innovation and accelerate market development. Facing the construction of next-generation AI cloud service intelligent computing center networks, 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. In the field of high-end data center switches, the industry's first 51.2T data center switch supporting LPO and 800G switch technology solutions using direct drive systems were launched to achieve high performance, low cost, and low energy consumption, and promote large-scale application of AI high-performance computing clusters; achieve mass production and delivery of next-generation TH5 switch products, and help customers become the world's first AIGC cluster commercialized manufacturer.
Profit forecasting and investment advice. EPS is expected to be 0.91 yuan, 1.19 yuan, and 1.43 yuan respectively in 2024-2026, and corresponding dynamic PE is 42 times, 32 times, and 27 times, respectively. Considering the increase in the share of high-speed switches brought about by AIGC, it is optimistic that growth will accelerate throughout the year. Coverage for the first time will be given a “holding” rating.
Risk warning: Risks such as downstream demand falling short of expectations, increased market competition, and rising prices of upstream raw materials.