Revenue and profit for the 1st quarter of 2024 are in line with our expectations
The company announced 1Q24 results: operating income +3.7% YoY to 134.495 billion yuan; service revenue +5.0% YoY to 124.347 billion yuan; net profit to mother +7.7% YoY to 8.597 billion yuan, net profit without return to mother +5.4% YoY to 9.160 billion yuan. Revenue and net profit performance are in line with our expectations.
Development trends
Service revenue is growing well. In 1Q24, the company's revenue was 134.495 billion yuan, +3.7% year-on-year. Among them, service revenue was 124.3 billion yuan, which maintained good growth of +5.0% year on year; sales of goods and other revenue was 11.15 billion yuan, -8.0% year over year, but the business was not the main business and gross margin was low, which had little impact on profits. By business: 1) Steady growth in mobile communication services: 1Q24 revenue was 52.26 billion yuan, +3.2% year on year, 412 million mobile users (399 million in the same period last year), including 329 million 5G package users (283 million in the same period last year), mobile ARPU of 45.8 yuan was the same as the same period last year, up 0.9% over the full year of last year; 2) Smart home business driven fixed network and smart home revenue +2.2% to 31,824 billion yuan, broadband comprehensive ARPU was 4.86 yuan, year on year + 2.1%; 3) Industrial digitization business revenue in 1Q24 was 38.679 billion yuan, +10.6% year-on-year.
Costs and expenses are strictly controlled, and with the exception of R&D expenses, the increase in costs is lower than the revenue growth rate. In 1Q24, the company's net profit not attributable to mother was +5.4% year-on-year. In 1Q24, the company's operating costs were 94.946 billion yuan, +3.8% year over year, reflecting the effect of digital cost reduction and efficiency. Sales expenses and management expenses decreased by 0.1% and 3.0% year on year, respectively; R&D expenses increased moderately, +13.8% year over year; and financial expenses fell 51% year on year, mainly due to a decrease in interest expenses on leasing liabilities.
Credit impairment losses increase as accounts receivable grow. In 1Q24, the company lost 2.2 billion yuan in credit impairment, +98.7% year-on-year, accounting for 1.8% of 1Q24 service revenue (0.9% in the same period last year). In 1Q24, the company's accounts receivable amounted to RMB 50.33 billion, +24.5% year-on-year. The company stated that it will continue to control accounts receivable through customer credit management, process management, and receipt management in the future. We believe that the annual credit impairment loss share is expected to be lower than 1Q24. In 1Q24, the company's net cash flow from operating activities fell 27.9% year on year to 20.86 billion yuan, mainly due to the purchase of goods and receipt of labor payments +15.9% year-on-year.
Profit forecasting and valuation
Considering the decline in sales of products and other revenue of 1Q Company, we lowered our 24/25E revenue forecast for A Shares by 0.9%/1.9% to $5359/562.8 billion yuan, and lowered the 24/25E revenue for H Shares by 0.9/ 1.9% to 5419.568.9 billion yuan. However, considering that the business had little impact on profits, the 24/25E net profit forecast for A Shares and H Shares remained basically unchanged. Current A shares correspond to a price-earnings ratio of 17.1 times/16.1 times in 24/25; corresponding to a 4.2% dividend rate for 24 years. Current H shares correspond to a price-earnings ratio of 11.0 times/9.9 times in 24/25; corresponding to a dividend rate of 6.6% in 24 years. Using the SOTP valuation method, A shares maintained an outperforming industry rating and target price of 8.30 yuan, corresponding to a price-earnings ratio of 23.3 times/21.9 times 24/25, with 36.1% upside compared to the current stock price. H shares maintained an outperforming industry rating and a target price of HK$5.80, corresponding to a price-earnings ratio of 14.5 times/13.0 times 24/25, with 32.1% upside compared to the current stock price.
risks
Competition in the cloud computing market has intensified, and the turnover of accounts receivable in the production and data business falls short of expectations.