Steady growth in performance, strengthening scale and value
China Unicom announced 1Q24 financial results on April 19. 1Q24's A-share revenue was 99.496 billion yuan (+2.3% YoY); A-share net profit was 2,447 billion yuan (+8% YoY). The company focused on high-quality development and maintained steady growth in revenue and profit. We are optimistic about the company's development in the context of digital China construction. We expect the 24-26 BPS for the company's A-shares to be 5.43/5.79/6.18 yuan, and the 24-26 BPS for the 24-26 BPS will be 12.13/12.84/13.62 yuan. Refer to the global operator Bloomberg, which is 1.34 times the 2024 PB, corresponding to the target price of 7.28 yuan, and maintain the “increase” rating; considering the impact of US Executive Order No. 13959, H shares will be given 0.61 times 2024 PB, corresponding to a target price of HK$8.00, maintaining a “buy” rating.
The share of the computing network digital intelligence business continues to increase; Unicom's cloud revenue continues to grow rapidly. In terms of traditional business, 1Q24's networked communication business revenue was 62.3 billion yuan. Among them, in terms of mobile services, the company's mobile users reached 337 million, and the 5G package penetration rate reached 80%; in the fixed-line broadband business, 1Q24 fixed-line broadband billing users reached 115 million, and the gigabit broadband penetration rate increased to 23%.
The revenue from the Internet Digital Intelligence business was 232 billion yuan, accounting for 26% of the main business revenue, and the revenue structure continued to be optimized. Unicom's cloud business revenue increased 30.3% year over year to 16.7 billion yuan; data center revenue increased 4.1% year over year to 6.6 billion yuan, and Internet Communications security revenue increased 70% year over year. The company continues to improve its competitiveness in the computing network field by continuously consolidating the digital intelligence capability base and creating differentiated capabilities.
Continued improvement in profitability and optimization of operating efficiency
1Q24's gross margin was 24.54%, up 0.13pct year on year, and the net margin was 5.59%, up 0.26pct year on year. As the company's user base continued to expand and reform and innovation continued to advance, the company's profitability continued to increase. In terms of cost ratios, 1Q24's sales/management/finance expense ratio changed by -0.02/-1.10/-0.07pct to 8.88%/4.71%/-0.05%, respectively, indicating that the company's operating efficiency has been optimized, and the scale effect is gradually being reflected; 1Q24's R&D expenses increased 0.19pct to 1.39% year over year. In the context of the continuous deepening of digital China construction, the company increased its investment in R&D. The number of authorized patents reached 362 in the first quarter, a steady increase over the previous year.
Profit is expected to continue to grow, maintaining the “increase in holdings” for A-shares and “buy” ratings for H shares. We are optimistic about the growth prospects and profitability of the company's digital business. We expect the 24-26 BPS for the company's A shares to be 5.43/5.79/6.18 yuan, and the 24-26 BPS for H shares will be 12.13/12.84/13.62 yuan.
Referring to global operator Bloomberg's consensus expectation, the 2024 PB average is 1.34 times the 2024 PB, and the corresponding target price is 7.28 yuan to maintain an “gain” rating; considering the impact of US Executive Order No. 13959, H shares are given 0.61 times 2024 PB, corresponding to the target price of HK$8.00, to maintain a “buy” rating.
Risk warning: 1) ARPU improvement fell short of our expectations; 2) 5G capital expenditure exceeded our expectations; 3) competition intensified; 4) the company adopted a more conservative dividend policy.