Matters:

The company announced its 2024 quarterly report. In the first quarter of 2024, the company achieved operating income of 29.272 billion yuan, an increase of 7.95% year on year; net profit to mother was 235 million yuan, an increase of 12.35% year on year.

Ping An's point of view:

The company's strategic business achieved rapid growth, and the revenue structure was further optimized. Revenue side: In the first quarter of 2024, the company achieved revenue of 29.272 billion yuan, an increase of 7.95% over the previous year. Strategic business aspects: In the first quarter of 2024, the company's cloud and digital business (hereinafter referred to as “cloud business”) achieved revenue of 1.68 billion yuan, of which high-value digital cloud business (MSP+ISV) achieved revenue of 366 million yuan, an increase of 127% over the same period last year, and the company's own-brand business achieved revenue of 1.25 billion yuan, of which the Xinchuang business achieved revenue of 1,138 billion yuan, a significant increase of 166% over the previous year. In the first quarter of 2024, the company's two strategic businesses, Cloud and Independent Brands, achieved rapid growth. The total revenue share exceeded double digits for the first time, and the revenue structure was further improved, injecting strong growth momentum into the company's development. Profit side: In the first quarter of 2024, the company achieved net profit of 235 million yuan, an increase of 12.35% over the previous year. In the first quarter of 2024, the company achieved a steady increase in net profit to mother.

The company's profitability continues to improve, and R&D investment has further increased. The company's net profit margin for the first quarter of 2024 was 0.80%, up 0.03 percentage points from the same period last year, and the gross margin was 4.57%, up 0.89 percentage points from the same period last year. As the company's strategic business revenue share continued to increase, the company's profitability continued to increase. The company's annual expense ratio for the first quarter of 2024 was 2.87%, up 0.65 percentage points from the same period last year. Among them, sales/management/R&D expenses were 1.54%/0.28%/0.30%, respectively, a change of -0.01/+0.02/+0.04 percentage points over the same period last year. The company's R&D expenses for the first quarter of 2024 were 87 million yuan, an increase of 23.76% over the previous year. In the first quarter of 2024, the company focused on strategic business and further increased R&D investment around generative AI, digital cloud integration, and Xinchuang products and solutions, and its competitive advantage is expected to continue to be consolidated.

AI supports strategic business breakthroughs, and new tracks continue to expand. Strategic business aspects: During the reporting period, the company actively expanded its layout in the intelligent computing and pan-AI industries. The revenue scale for the first quarter of 2024 was close to that of the previous year. A series of own-brand products such as Shenzhou Kuntai all-in-one computers and Shenzhou Kuntai self-developed servers were launched one after another. Through the “General Server Government Procurement Requirements Standard Thematic Assessment”, Shenzhou Kuntai's AI computing power-related business achieved explosive growth. The revenue scale for the first quarter of 2024 was close to the full year of the previous year. In terms of expanding the new track: The company is actively expanding new development space. In the first quarter of 2024, the company officially announced “going overseas” for the first time, its international business headquarters settled in the Greater Bay Area of Shenzhen, and signed a Memorandum of Understanding (MOU) on cooperation with Thailand's Ministry of Digital Economy and Social Affairs, opening a new chapter of international layout. At the same time, in the automotive sector, the company set up an automotive industry team to join hands with its company Hi-Tech Shuju and Shenzhen Data Exchange to first test the best practices for asset registration; launch a full-link operation service for the first comprehensive NEV live broadcast base in China to create a differentiated competitive advantage with data as the core. In addition, the company's Shenzhen Artificial Intelligence Computing Center project was officially launched in the first quarter and will be put into operation in the near future.

Profit forecast and investment advice: According to the company's 2024 quarterly report, we maintain the company's profit forecast for 2024 to 2026. We expect the company's net profit to be 1,428 billion yuan, 1,754 billion yuan and 2,160 billion yuan respectively, EPS of 2.13 yuan, 2.62 yuan and 3.23 yuan respectively, and PE corresponding to the closing price of April 29, 2024 is 14.6X, 11.9X and 9.6X, respectively. The company is a leading IT distribution leader in China. It has been deeply involved in the enterprise-level IT market for many years. The advantages of the accumulated ToB channel have built a strong moat for the company and empowered the company's strategic business (cloud+credit innovation). In terms of cloud business, the company has full-stack cloud capabilities and full-license cloud qualifications. At the same time, it also launched the Shenzhou Education Platform to lay out an enterprise-level AIGC market to enable cloud business development. In terms of independent brand business, the company has created a complete Shenzhou Kuntai series of products based on Huawei's “Kunpeng + Shengteng” ecosystem, which is deeply located on the Xinchuang and AI tracks. We believe that in the future, the company will benefit from the general trend of enterprises going to the cloud and digital transformation, as well as the waves of Xinchuang and AIGC to further open up room for growth. We continue to be optimistic about the company's development and maintain a “recommended” rating.

Risk warning: 1) The development of the company's IT distribution business fell short of expectations. The traditional IT distribution business has low gross margins and high capital consumption, and is an industry that extremely tests the company's operating efficiency. Maintaining a leading position in such a fiercely competitive industry for a long time is a huge challenge to the company's comprehensive supply chain management capabilities and financing capabilities, and requires the company to further strengthen its level of refined management. If the company's management capabilities do not continue to be at a high level or market competition intensifies, there is a risk that the future development of the company's IT distribution business will fall short of expectations. 2) The development of the company's Xinchuang business fell short of expectations. The company's technology route on the Xinchuang circuit is currently one of the mainstream structures in the market, but if the company cannot continue to iterate and upgrade technology or the market expansion falls short of expectations, then there is a risk that the company's Xinchuang business development will fall short of expectations. 3) The development of the company's cloud business fell short of expectations. As a provider of cloud management services and digital solutions on the cloud, the company has maintained close cooperation with major domestic and foreign cloud giants such as AWS, Microsoft Cloud, and HUAWEI CLOUD for a long time. However, if the company cannot continue to maintain close partnerships with major cloud giants in the future, there is a risk that the growth rate of the company's cloud service business will fall short of expectations.