1Q24 revenue and net profit performance to mother are in line with our expectations
The company announced 1Q24 results: operating income of 263.7 billion yuan, +5.2% year over year; of which communication service revenue was 219.3 billion yuan, +4.5% year over year; net profit to mother was 29.6 billion yuan, +5.5% year over year. The 1Q24 revenue and net profit performance to mother were in line with our expectations.
Development trends
Revenue grew steadily, mobile ARPU remained flat year over year, and comprehensive household ARPU increased slightly year over year.
1Q24 revenue was 263.7 billion yuan, up 5.2% year on year, of which communication service revenue was 219.3 billion yuan, up 4.5% year on year. By business: 1) Personal market: mobile users are growing steadily, and ARPU is flat year over year. At the end of 1Q24, the number of mobile customers was 996 million, up 1.3% year over year (983 million in the same period last year); 799 million 5G package customers (689 million in the same period last year). 1Q24 mobile ARPU was 47.9 yuan, the same as the previous year. 2) Home market: Broadband users continued to grow, and the comprehensive ARPU of Home Broadband increased year-on-year. At the end of 1Q24, there were 305 million broadband users, +8.5% year-on-year (281 million in the same period last year). Among them, the comprehensive broadband ARPU for home customers was 39.9 yuan, +1.8% year-on-year. 3) Government and enterprise market: Increase efforts to expand the merchant market, and DICT's business revenue has maintained good growth.
Costs and expenses were well controlled, and net profit achieved good year-on-year growth. In 1Q24, net profit to mother was +5.5% YoY, after deducting non-net profit +8.4% YoY. 1Q24 gross margin was +1.7ppt to 26.2% year over year. We think it was mainly due to the decline in depreciation due to adjustments in accounting estimates; 1Q24 sales, management, and R&D expenses increased 13.6%/2.0%/6.7% year over year, respectively. We believe that the rapid increase in sales expenses is mainly due to high investment in sales activities in the first quarter. Earnings from changes in fair value in 1Q24 were -63% year-on-year to $1.36 billion, which we believe was mainly due to fluctuations in the investment market.
Accounts receivable and credit impairment losses increased. 1Q24 credit impairment losses amounted to $7.109 billion, or +72.9% year-on-year, accounting for 3.2% of communications service revenue (2.0% in the same period last year). We think it was mainly due to an increase in accounts receivable and a slight increase in account age. 1Q24 accounts receivable were +24.9% year-on-year. The net cash flow from operating activities in 1Q24 was $56.9 billion, -24.3% YoY. We believe it was mainly due to the purchase of goods and payment of labor expenses +24.7% YoY. Considering that central enterprises have strict requirements for managing accounts receivable and cash flow, we believe that the share of credit impairment in revenue for the whole year is expected to decrease compared to 1Q24.
Profit forecasting and valuation
Considering the decline in fair value change earnings and the increase in credit impairment losses, we lowered the 24/25 net profit of A shares by 3.2%/4.8% to $1390/146.2 billion; the net profit of Hong Kong stocks in 24/25 was reduced by 3.2%/4.9% to $1390/146.1 billion. The current A share price corresponds to a price-earnings ratio of 16.3/15.5 in 24/25. The current Hong Kong stock price corresponds to the 24/25 price-earnings ratio of 9.6/8.7 times. Currently, the company's stock price corresponds to 24E shares and the dividend rates for Hong Kong stocks are 4.5% and 7.6%, respectively. Using the SOTP valuation method, A shares maintained an outperforming industry rating and a target price of 110.0 yuan, corresponding to a price-earnings ratio of 16.9/16.1 times 24/25, with 3.7% upside compared to the current stock price. Hong Kong stocks maintained an outperforming industry rating and a target price of HK$85.0, corresponding to 11.7/10.6 times the 24/25 price-earnings ratio, with 21.9% upside compared to the current stock price.
risks
Competition in the cloud computing market has intensified, and the profit level of government and enterprise services falls short of expectations.