Incidents:
On April 17, 2024, the company released its 2023 annual report: annual revenue of 14.353 billion yuan, up 10.34% year on year; net profit to mother of 1,836 billion yuan, up 18.88% year on year; net profit after deducting back to mother was 1,278 billion yuan, up 10.98% year on year; net cash flow from operating activities was 3,510 billion yuan, up 212.02% year on year. In the fourth quarter of 2023, we achieved revenue of 6.595 billion yuan, up 17.31% year on year; net profit to mother was 1,086 billion yuan, up 21.89% year on year; net profit after deduction was 868 million yuan, up 11.54% year on year.
Investment highlights:
Profitability remains at a good level, and business transformation is basically complete
In 2023, the company's gross sales margin reached 26.26%, the same as the previous year; sales expense ratio/management expense ratio/R&D expenses ratio were 5.23%, 2.05%, and 9.17%, respectively, +0.47pct, -0.33pct, and +0.67pct, respectively, and sales and R&D investment continued to increase. Other revenue was 555 million yuan, up 29.98% year on year, mainly due to government subsidies of 546 million yuan in 2023, an increase of 128 million yuan over year. Investment income was 361 million yuan, up 45.39% year on year, mainly due to the increase in net profit of joint ventures. As a result, the company's net sales profit was 13.08%, up 0.65pct year-on-year.
In 2023, the top five customers accounted for 85.02% of total revenue, reaching a record high (56.68%, 62.24%, and 78.63% in 2020-2022, respectively), with customer 1 accounting for 52.67% of sales. We anticipate that the company's strategic goal of transforming an upstream server solution provider has largely been achieved.
Continue to focus on investing in computing power, and the construction of intelligent computing centers is expected to accelerate
The company continues to strengthen investment in R&D, improve product performance, and enrich product sequences. In 2023, the company invested 2,444 billion yuan in R&D. Fundraising projects for high-end computers, IO modules, and built-in active control firmware based on domestic processors were successfully completed, and its technical advantages gradually improved. At the same time, in the face of large-scale construction needs such as intelligent computing centers, the company is deeply involved in digital infrastructure construction, continuously improving the comprehensive capabilities of intelligent computing center solutions, and empowering digital intelligence development in multiple regions and industries with various advantages such as distributed all-flash storage, immersive liquid cooling, and computing services.
Facing the new requirements of “accelerating the development of new quality productivity,” the company proposed a new idea of “three-dimensional computing” to accelerate the transformation of computing power into productivity through three-dimensional computing power construction, three-dimensional application empowerment, and three-dimensional ecological symbiosis, thereby unleashing the development power of various industries and regions, and creating a new computing system construction and operation model. Looking forward to the future, research and innovation in the field of large models at home and abroad will advance by leaps and bounds. Large model technology innovations such as MoE will further accelerate the commercialization of large models. At the same time, the country will actively introduce policies to promote the construction of intelligent computing centers. We expect that in 2024-2025, the size of China's intelligent computing power market will continue to grow at an accelerated pace, and the company is expected to benefit as a leading domestic computing power and intelligent computing power enterprise.
Strengthening the autonomous computing industry ecosystem, Xinchuang server demand has actively extended its layout to the computing ecosystem business, investing in many high-quality assets such as Haiguang Information, Zhongke Star Map, Shuguang Cloud Computing, Zhongke Sanqing, Zhongke Tianji, and Shuguang Digital Innovation. The subsidiary's business covers the computing power industry chain such as chips, server hardware, IO storage, cloud computing, and computing power services. The subsidiary's layout has a strong synergy effect with the company's main business such as high-end computers and storage, and will also contribute to the company's performance growth.
On April 11, 2024, Haiguang Information disclosed the forecast for daily related transactions. It is estimated that the cumulative transaction amount with related parties from the beginning of 2024 to April 11 is 2.2 billion yuan, while the cumulative transaction amount that has occurred from the beginning of 2023 to April 17, 2023 is 633 million yuan. We believe that the increase in transactions related to Haiguang Information may reflect the growing trend of demand for Xinchuang servers in China and the demand in the Haiguang processor industry chain in 2024.
Profit forecast and investment rating: The company is a leading domestic computing power and intelligent computing power enterprise. It will benefit from the continuous development of large-scale model technology and the acceleration of the construction of intelligent computing centers. We adjusted our profit forecast. The net profit for 2024-2026 is expected to be 23.02/28.69/35.28 billion yuan, EPS is 1.57/1.96/2.41 yuan/share, respectively, and PE corresponding to the current stock price is 30/24/19X, respectively, maintaining a “buy” rating.
Risk warning: Macroeconomics affects downstream demand, Xinchuang's progress falls short of expectations, demand for AI computing power falls short of expectations, market competition intensifies, and the game between China and the US intensifies.