Key points of investment:
Announcement: According to the annual report, Softcom Power achieved operating income of 17.58 billion yuan (-8%) and net profit to mother of 530 million yuan (-45.2%) in 2023.
2023Q4 achieved operating income of 4.75 billion yuan (-3.4%) and net profit of 180 million yuan (-39.7%) to mother. 2024Q1 achieved operating income of $5.45 billion (+29.7%) and net profit attributable to mother of $280 million (profit and loss). The results fell slightly short of expectations.
The decline in revenue in 2023 was mainly due to a decline in traditional IT outsourcing services in the communications equipment industry and the Internet industry. According to the annual report, the revenue of the communications equipment industry in '23 was 7.05 billion yuan (-18.4%), and the revenue of the Internet industry was 3.29 billion yuan (-9.3%). Outsourcing of Huawei 23H1, the largest customer in the communications industry, has experienced price cuts, leading to a decline in revenue. The Internet industry is mainly due to a contraction in its BPO demand. By business, general technology services (traditional IT outsourcing) revenue fell 16.4%. The financial industry and consulting solutions performed well. The revenue of the financial industry in '23 yoy was +6.3%, showing resilience. Looking at consulting and solutions revenue by business, yoy is +24.1%. The company has signed a number of tens of million-level consulting projects in deep industry to provide strong support for performance.
23 Full year comprehensive gross profit margin 19.3%, net profit margin 2.77%. According to the annual report, gross margin fell 2 pct year on year in '23. The pressure was mainly due to H1 outsourcing price cuts. By quarter, gross margin recovered quarter by quarter. Affected by the decline in gross margin throughout the year, net profit margin fell 2.2 pct year over year. Furthermore, sales and management expenses increased slightly in 23 years, mainly because the company completed the marketing layout in 40 cities across the country and expanded to Southeast Asia and the Middle East.
The net cash inflow from operating activities in '23 was 872 million yuan, and the cash flow situation was healthy. According to the annual report, it is mainly due to the improvement in the company's repayment management level, and operating receivables increased by only 130 million yuan (510 million yuan in '22).
24Q1 was calculated and combined to achieve revenue growth in a single quarter, but the hardware business lowered the company's overall gross profit margin. According to the annual report, 24Q1 gross profit margin was 10.7%. 24Q1 losses in a single quarter were mainly due to 1) the completion of the Tongfang merger and acquisition at the end of January 24, increasing costs and expenses such as initial business integration and organizational development; 2) increased interest expenses on mergers and acquisitions loans; 3) fluctuating market demand and price competition among key customers during the Spring Festival.
Hongmeng+ Open Source Hongmeng/Oula/Gauss continued to break through. According to the annual report, in Hongmeng's business, the company has upgraded the Qualcomm and MTK platforms to cover most high-end mobile phone models, and undertook Hongmeng system tablet and PC testing projects. Open Source Hongmeng completed the implementation of SwanLinkOS in commercial displays, mining protectors, electricity meters, etc.; Open Source Euler won the bid for the mobile project, and Open Source Gauss and Huawei jointly expand customers in the financial sector. The computing power layout is perfect. The acquisition of Tongfang was completed in January, and all-in-one products such as the Ascend All-in-One PC, Kunpeng All-in-One PC, and the AI Training and Promotion Integrated Platform were released, and it obtained the status of a partner partner for Huawei's Ascend All-in-one Solution. A complete product system including servers and all-in-one computers has been set up.
Profit forecast and valuation: Due to the asset acquisition in January 2024, we raised our revenue forecast and lowered our profit forecast. It is expected to achieve revenue of 28.96, 336.2, and 38.54 billion yuan in 24-26 years (255.3 billion yuan and 29.76 billion yuan before adjustment), and net profit of 6.99, 9.24, and 1,084 billion yuan (12.69 billion yuan and 1,538 billion yuan before adjustment). Due to the start of commercialization businesses such as Hongmeng, Eula, and Gauss in 23, it is expected that large-scale revenue cannot be generated in 24, but we still need to maintain a high level of investment. We use PE 2025E as a valuation index to give the company comparable to PE 2025E has an average value of 59x, and the current market value corresponds to a valuation of 46x, maintaining a “buy” rating.
Risk warning: Competition in the industry has intensified, the progress of the localization policy has fallen short of expectations, and the effects of integration with the same party have fallen short of expectations.