Key points of investment:
Incident: Recently, the company released its 2024 quarterly report. The first quarter achieved operating income of 1,035 million yuan, -14.66% year-on-year; net profit to mother was 489 million yuan, compared to the same period last year - 412 million yuan, and losses increased. Net operating cash flow was 1.154 billion yuan, compared to 466 million yuan in the same period last year, and net operating cash flow declined. The results were generally in line with expectations.
The overall safety business is under pressure, and the energy storage window period has been adjusted. According to the company's announcement, the downstream economy was optimistic about economic recovery during the same period in 2023, and there was a brief rebound in demand. Currently, the domestic macroeconomy is still recovering slowly, downstream customers are cautious about IT investment, and the new order situation in the first quarter of 2024 is not ideal. The company adjusted its marketing and sales strategy and personnel organization structure in the first quarter. According to the characteristics of strategic products, adjust the cooperation model around new channels and promote the upgrading of the channel system. Penetrate leading markets through innovative platform solutions and key products. Market-side adjustments are not conducive to short-term performance, and positive effects are expected to be seen in the future.
Continued cost reduction and efficiency, and the results of refined management were evident. According to the company announcement, in the face of external uncertainty, the company continuously improved the level of refined management through continuous organizational capacity building and business process optimization. Sales/management/R&D expenses were -4.84%/-2.74%/-8.17%, respectively.
The decline in net operating cash flow was mainly affected by inventory and bonuses. According to the company's announcement, net operating cash flow for the first quarter was 1,154 million yuan, compared to 466 million yuan for the same period last year. On the one hand, the company's inventory increased to 537 million yuan, +40.25% over the same period last year, mainly due to strategic stocking to cope with the rise in raw materials; on the other hand, safety requirements are still recovering, and the industry generally controls bonus expenses. The amount of year-end bonuses paid by the company has increased compared to the same period last year, reflecting the company's high priority on talents and confidence in long-term development.
With the launch of secure GPT 3.0, hyperconvergence took the lead. According to the company's official website, security GPT 3.0 was released in January 2024, adding anti-targeted phishing attacks. The detection rate was increased to 91.4%, and the false alarm rate was reduced to 0.046%. At the same time, a self-developed AI computing power platform was launched to provide tools for the entire process from large model development to deployment to achieve a balance of cost and performance. On April 15, according to IDC, China's hyperconverged market size was +2.9% year-on-year in 2023. I am convinced that it ranked first in the overall hyperconvergence market in China, with a market share of 17.5%. Based on deep accumulation of virtualization technology, it continues to empower infrastructure clouds.
Investment analysis opinion: Maintain a “buy” rating. Safety budgets for some downstream industries are tightening, and profit forecasts have been lowered. Security revenue is expected to grow at 3%/5% (previously forecast 24%/21%) and cloud revenue growth rate is expected to grow at 10%/10% (originally forecast 25%/23%) on 24/25.
Revenue for 24/25 is estimated at 81.22/8.698 billion yuan (original forecast of 10.551/12.763 billion yuan), and net profit to mother of 275/388 million yuan (original forecast of 678/935 million yuan). An additional 26-year revenue/net profit forecast of $93.20/572 million yuan was added. The security industry is still in full swing, and the company's market strategy and structural adjustments have led to preemptive costs. The cloud computing business is still in the large-scale phase, and is not expected to be profitable for the time being. A segmented valuation method is used. Refund of equity incentive costs (non-recurring), with reference to comparable companies (excluding anomalies), the 2024 security and wireless/cloud business segment valuation is about 143/153 billion. The company's target market value is about 29.6 billion dollars (decimal margin effect), with room for increase of 27.8%. Maintain a “buy” rating.
Risk warning: slow recovery of security services; increased competition between security and cloud computing services; slow breakthroughs by leading customers, etc.