Key points of investment
The company disclosed the 2023 annual report, with total operating income of 65.867 billion yuan (-5.41% YoY), net profit of 1.783 billion yuan (YoY -14.54%), net profit of 1.118 billion yuan (YoY -35.87%); total operating income of 17.77 billion yuan (YoY +5.34%), net profit attributable to mother of 996 million (YoY +84.47%), net profit not attributable to mother was 689 million (YoY +103.13%), which is in line with expectations;
Gross margin increased in the fourth quarter
(1) Of total revenue in 2023, by product, 65.240 billion yuan for servers and components (-5.53% YoY), 393 million for IT terminals and parts (+29.77% YoY), and 234 million (YoY -14.73%); by region, domestic revenue of 56.085 billion (YoY -6.83%), overseas revenue of 9.547 billion (YoY +4.17%); by sales model, region 16.026 billion (YoY +11.33%), industry 49.606 billion (YoY -9.75%) ; (2) The gross profit margin in 2023 was 9.89% (1.15pct year-on-year decrease), and the Q4 gross profit margin was 11.05% (2.51 pct year-on-year increase). We believe that the main reason is that the value of self-supplied components in AI servers is lower than that of general-purpose servers, which led to a decline in gross margin throughout the year, while tightening supply in the fourth quarter marginally raised the gross profit margin for the single quarter.
Continued AI research and development, the next-generation G7 computing power platform supports the widest range of accelerator chips in 2023 with a sales/management/R&D expense ratio of 2.21%/1.16%/4.66% (up 0.04/0.14/0.01pct year over year). The company released a new generation G7 computing power platform, which supports the widest range of general-purpose processors and accelerators, and has reduced the average cycle of new product development in the R&D digital system from 1.5 years to 8 months, shortening 50%. From customer requirements to delivery of prototypes, it only takes 3 months as fast as 3 months.
Increase operational inventory to meet AI computing power requirements
Financial expenses in 2023 - $203 million, a year-on-year decrease of 343.42%, mainly due to a decrease in interest expenses for the current period; net cash flow from operating activities of $520 million, a year-on-year decrease of 71.30%, mainly due to increased operating preparations and increased purchase payments in the current period; and $717 million (+116.78% year over year), mainly due to an increase of 443 million in VAT plus deductions.
Under the high computing power boom, server share continues to lead
In 2023, the company continued to focus on smart computing represented by cloud computing, big data, and artificial intelligence, and continued to innovate in R&D, production, delivery, and service models. According to the latest data released by Gartner and IDC, the company continued to maintain the leading global market share of servers and storage products: in 2023, the company was ranked second in the server world, number three in the storage world, number one in China, and number one in liquid cooled servers in China.
Profit forecasting and valuation
We expect the company's 24-26 revenue of 765.50/872.09/99.889 billion (YoY +16.22%/13.92%/14.54%), net profit of 21.96/27.75/3.163 billion (YoY +23.19%/26.37%/13.98%), corresponding PE to 23.41 /18.53 /16.26, maintaining a “buy” rating.
Risk warning
Corporate governance risk, supply chain risk, increased competition risk, risk of exchange rate fluctuations, risk of rising labor costs, risk of technological upgrading, etc.