Incident: On April 26, 2024, the company released its 2024 quarterly report. In 24Q1, the company achieved operating income of 2.147 billion yuan, -0.24% year over year; net profit to mother of 0.2 billion yuan, -98.07% year on year; net profit after deducting non-return to mother - 13 million yuan, -111.66% year on year.
Profits are under pressure in the short term, waiting for downstream demand to recover. The uncertainty of the macroeconomic environment poses huge challenges to the ICT industry. According to IDC statistics, market capacity has declined for the first time in nearly 4 years. But in the long run, the company's ICT infrastructure industry will still benefit from the digital economic growth wave. In 2024, with the gradual implementation of the digital China construction plan, it will drive the digital transformation process of various industry segments, thereby continuing to drive demand for information and communication equipment. At the beginning of this year, the State Council launched a large-scale equipment renewal and trade-in action plan, which will also drive the upgrading of intelligence, digitalization, and informatization of related industries.
As the scale of operations expanded, the company increased its cost investment. Q1 achieved a gross profit margin of 38.52%, a year-on-year decrease of 3.82 pct, and a month-on-month decrease of 0.94 pct. We believe that product prices were under pressure mainly due to weak downstream demand; Q1 achieved a net profit margin of 0.11%, a year-on-year decrease of 5.44 pcts, a year-on-year decrease of 3.3 pcts. The company's three-fee rate increased by 3.03 pct year-on-year and 2.18 pct month-on-month, mainly due to the expansion of the company's business scale and the increase in sales and management expenses. 24Q1 sales, management, and R&D cost rates changed by +2.8/+1.2/-0.9 pct year-on-year, respectively.
Adapt to the wave of AI and digitalization, and continue to consolidate product competitiveness. According to data released by the company in March 2024, Ruijie ranked first in the local computing cloud terminal market share in China in 23, IDV cloud desktop market ranked first for 3 consecutive years, in the Chinese enterprise WLAN market, Wi-Fi 6 product shipments for 5 consecutive years, and ranked third in the Ethernet switch, data center switch, and enterprise WLAN market. The company's park switch market share ranked first in the domestic education and distribution industry; the data center switch market share ranked second in the domestic Internet industry; and the market share of WLAN products ranked first in the domestic Internet, education, communications and service industries. In the field of data center networks, the company officially became a new member of the Super Ethernet Alliance. The data center switches and 400G data center switches based on silicon light and liquid cooling technology have been applied in Internet vendor data centers, and AI Fabric intelligent computing center network solutions and smart speed DDC high-performance network solutions and related products were launched; the company collaborated with ByteDance to showcase 51.2T data center switches based on LPO technology at OFC in '24. In the field of parks, the company's minimalist Ethernet all-optical solutions and related products provide networks for enterprise workshop/warehousing/office/R&D scenarios, reducing costs and improving efficiency. In the field of cloud office, the company's GPU cloud solution won the pConline2023 Zhizhen Technology “Annual Technology Innovation Award”. The next-generation Sanengine Cloud desktop solution fully covers core scenarios such as enterprise office, production, and R&D.
Investment advice: The AI wave is driving the acceleration of digital infrastructure construction, and the company, as an ICT infrastructure leader, is expected to fully benefit. We expect the company's net profit to be 650 million yuan/850 million yuan/1.09 billion yuan respectively in 24-26 years, and the current market value corresponding to PE is 31x/23x/18x. Maintain a “Recommended” rating.
Risk warning: New product expansion falls short of expectations, downstream demand recovery falls short of expectations, etc.