Matters:

The company announced its 2023 annual report. In 2023, the company achieved operating income of 14.353 billion yuan, an increase of 10.34% over the previous year, and realized net profit of 1,836 billion yuan, an increase of 18.88% over the previous year. The 2023 profit distribution plan is: it is proposed to pay a cash dividend of RMB 1.70 (tax included) for every 10 shares.

Ping An's point of view:

The company's performance achieved steady growth. According to the company's announcement, in 2023, the company achieved operating income of 14.353 billion yuan, a year-on-year increase of 10.34%; achieved net profit of 1,836 billion yuan, an increase of 18.88% over the previous year, and the company achieved steady growth in revenue and profit in 2023. By business, in 2023, the company's IT equipment business, software development and service business achieved revenue of 12.780 billion yuan and 1,567 billion yuan respectively, an increase of 11.63% and 0.75% over the previous year. On the cost side, in 2023, the company's expenditure rate for the period was 15.90%, an increase of 1.02 percentage points over the previous year, mainly due to the increase in R&D expenses. In 2023, the company achieved a gross profit margin of 26.26%, the same as the previous year, and achieved a net profit margin of 12.79% to mother, an increase of 0.92 percentage points over the previous year. During the reporting period, the company continued to focus on the production and operation of its main business and is committed to providing customers with quality services. Through continuous investment in R&D, improving product quality, and deepening marketing services, the company's overall competitiveness continues to improve. We are optimistic about the company's future development.

The company pays great attention to research and development, and the core competitiveness of high-end computers continues to improve. The company has always focused on the research and development of core products such as high-end computers. At present, it has mastered a large number of core key technologies, and has high-end computer system R&D capabilities and continuous innovation capabilities. In 2023, the company's R&D expenses were 1,316 billion yuan, an increase of 19.07% over the previous year. The R&D expenditure ratio was 9.17%, an increase of 0.67 percentage points over the same period last year. The fund-raising project for high-end computers based on domestic processors, IO modules, and built-in active control firmware was successfully completed. The company launched smart all-in-one products with industry application scenarios for the financial and other industries, and continued to improve product performance in terms of component performance management, product stability, high-speed interconnection, etc., and comprehensively upgraded the expandability and manageability of high-end computers, and gradually increased their technical advantages and product influence. At present, the company's high-end server products cover product forms such as immersion liquid cooling, cold plate liquid cooling, etc., and have the characteristics of energy efficiency, safety and stability, and high integration. With the deepening of the localization substitution policy, the domestic high-end computer products launched by the company have been widely used by customers in operators, finance, energy, Internet, education and other industries, covering fields such as infrastructure, e-government, enterprise informatization, and urban informatization. The company's high-end computer product system is gradually improving, which is expected to provide continuous and stable support for the company's development.

The wave of artificial intelligence and liquid cooling technology will drive the company's development. AI aspect: The accelerated development of artificial intelligence is driving the increase in demand for computing power. In 2023, the “Action Plan for the High-Quality Development of Computing Power Infrastructure” issued by six departments including the Ministry of Industry and Information Technology proposed that in 2025, China's computing power scale will exceed 300 EFLOPS, accounting for 35% of intelligent computing power. The government has issued intelligent computing center development plans in many places. Shanghai plans to account for more than 50% of total computing power by 2025; on the enterprise side, the State Council's State-owned Assets Administration Commission Artificial Intelligence Special Promotion Conference proposed that central enterprises speed up the layout and development of intelligent industries, consolidate the foundation for development, and accelerate the construction of a number of intelligent computing power centers. Facing large-scale construction needs such as intelligent computing centers, the company is deeply involved in digital infrastructure construction, while continuously improving the comprehensive capabilities of intelligent computing center solutions, empowering digital intelligence development in multiple regions and industries with multiple advantages such as distributed all-flash storage, immersive liquid cooling, and computing services. The development of artificial intelligence brings about the release of demand for intelligent computing power, which will further open up the company's room for growth. In terms of liquid cooling: According to the “China Semi-Annual Liquid Cooling Server Market (First Half Year of 2023)” issued by IDC, in the first half of 2023, China's liquid cooled server market has reached 660 million US dollars, up 283.3% year on year, and is expected to reach 1.51 billion US dollars for the whole year. IDC predicts that in 2022 to 2027, the compound annual growth rate of China's liquid cooled server market will reach 54.7%, and by 2027, China's liquid cooled server market will reach 8.9 billion US dollars. The company's subsidiary Shuguang Digital Innovation is the only domestic enterprise to achieve large-scale commercial deployment of submerged phase change liquid cooling technology. According to CCD Consultants' “2023 China Liquid Cooling Application Market Research Report”, from 2021 to the first half of 2023, Shuguang Digital achieved an average market share of 58.8%, ranking first in China's liquid cooling data center infrastructure market deployment scale, and has been at the top of the industry for many years. As the proportion of liquid cooling data center solutions in China and the world continues to increase, the company is expected to benefit deeply from leading liquid cooling technology.

Investment advice: According to the company's 2023 annual report, we adjusted the performance forecast. The company's net profit for 2024-2026 is estimated to be RMB 2.03 billion (previous value of RMB 2,519 billion), RMB 2,908 billion (previous value: RMB 32.16 billion) and RMB 3,743 billion (increase); EPS is 1.57 yuan, 1.99 yuan and 2.56 yuan, respectively, and PE corresponding to the closing price on April 19 is 28.4, 22.5 and 17.5 times, respectively. The company is a leading provider of ICT infrastructure solutions in China. It pays great attention to R&D. The core competitiveness of high-end computers continues to improve, and its business performance achieved steady growth in 2023. In the future, the company will continue to benefit from the development of artificial intelligence and liquid cooling technology. We are optimistic about the future development of the company and maintain the “Recommended” rating.

Risk warning: 1) The risk of AI business development falling short of expectations. Facing large-scale construction needs such as intelligent computing centers, the company continues to improve the comprehensive capabilities of intelligent computing center solutions, but if the comprehensive capabilities of the company's intelligent computing center solutions do not meet expectations, then there is a risk that the company's AI business development will fall short of expectations. 2) The risk that the liquid cooling business will fall short of expectations. Currently, the company's liquid cooling technology is in a leading position in China, but if the company cannot continue to iterate liquid cooling technology or the technology iteration is not timely, there is a risk that the company's liquid cooling business will not develop as expected. 3) The risk of increased competition in the market. The company's high-performance computing sector faces many domestic and foreign competitors. In the context of new infrastructure, if the company fails to seize market opportunities, it may be overtaken by competitors.