Incident: On the evening of April 29, the company released the “2023 Annual Report” and the “2024 First Quarter Report”. In 2023, the company achieved operating income of 77.308 billion yuan, an increase of 4.39% over the previous year; achieved net profit of 2.03 billion yuan, a year-on-year decrease of 2.54%, and realized net profit without return to mother of 1,675 billion yuan, a year-on-year decrease of 4.80%, and EPS of 0.74 yuan, a year-on-year decrease of 2.54%. 2024Q1 achieved operating income of 17.06 billion yuan, a year-on-year increase of 2.89%; realized net profit of 414 million yuan, a year-on-year decrease of 5.76%, and realized net profit without deduction of 343 million yuan, an increase of 1.75% over the previous year.
Revenue has maintained steady growth, and the “cloud-network-security-computing-storage-end” full-stack business layout has been built in depth. In 2023, the company achieved operating income of 77.308 billion yuan, a year-on-year increase of 4.39%; realized net profit attributable to mother of 2.03 billion yuan, a year-on-year decrease of 2.54%, and realized net profit withheld from mother of 1,675 million yuan, a year-on-year decrease of 4.80% (government subsidy of 948 million yuan in 2023 and government subsidy of 717 million yuan in 2022). In 2023, the company will further build a “cloud-network-security-compute-storage-end” full-stack business layout, continue to utilize computing power and full-stack connectivity capabilities, fully empower customers with the “AIfor ALL” strategy, and achieve steady revenue growth.
Looking at a single quarter, the growth rate of 2023Q4's revenue and net profit improved markedly. 2023Q4 achieved revenue of 22.0093 billion yuan, up 9.55% year on year (Q1/Q2/Q3 +7.74%/+2.39%/-1.63% year on year, respectively); realized net profit of 562 million yuan, up 8.50% year on year (Q1/Q2/Q3 +17.92%/-0.69%/-23.75% year on year, respectively), and the revenue and net profit growth rates in a single quarter were significantly restored. We believe that the main reason is the gradual implementation of Q4 operator, government and enterprise customer projects, which led to a recovery in the company's revenue growth rate. 2024Q1 achieved operating revenue of 17.06 billion yuan, a year-on-year increase of 2.89%, and achieved net profit of 414 million yuan, a year-on-year decrease of 5.76%. The 2024Q1 company comprehensively strengthened its “intelligent computing strategy” leadership, further expanded the intelligent application of the TCC model, and supported the development needs of the AIGC industry with full-stack capabilities.
The three domestic operators in Xinhua showed strong development momentum, and the scale of international business revenue continued to expand.
In 2023, Xinhua achieved revenue of 51.939 billion yuan, a year-on-year increase of 4.27%, and realized net profit to mother of 3.411 billion yuan, a year-on-year decrease of 8.59%. Among them, 1) The domestic operator business achieved revenue of 9.869 billion yuan, an increase of 11.75% over the previous year. In the field of cloud computing and AI, Xinhua 3 participated in the construction of China Mobile's new intelligent computing center, won the bid for China Telecom's AI computing power server procurement project, and continues to lead the share in the construction of Tianyi Cloud and Unicom's backbone cloud pools. 2) The international business achieved revenue of 2.02 billion yuan, an increase of 19.70% over the previous year, and revenue from H3C brand products and services of 1,410 billion yuan, an increase of 62.04% over the previous year. In 2023, Xinhua released a new overseas strategy, and the influence of overseas brands continues to increase.
In terms of other subsidiaries, 1) Ziguangyun: Achieved revenue of 1,508 billion yuan in 2023, an increase of 0.33% over the previous year, and realized net profit to mother of 249 million yuan, and losses continued to narrow. 2) Ziguang Digital: In 2023, it achieved revenue of 22.784 billion yuan, a year-on-year increase of 3.35%, and realized net profit to mother of 238 million yuan, a year-on-year decrease of 2.49%. 3) Ziguang Software: In 2023, it achieved revenue of 3,547 billion yuan, a year-on-year increase of 11.67%, and achieved net profit of 82 million yuan to mother, an increase of 14.85% over the previous year.
By product and region, the share of ICT infrastructure and services and revenue from overseas regions continues to rise. 1) By product: In 2023, the company's ICT infrastructure and service revenue was 51,506 billion yuan, up 10.15% year on year, accounting for 66.63% of revenue, up 3.48 pct year on year; IT product distribution and supply chain service revenue was 29.132 billion yuan, down 9.83% year on year, accounting for 37.68% of revenue, down 5.94 pct year on year.
2) By region: The company's domestic revenue in 2023 was 74.612 billion yuan, up 4.01% year on year, accounting for 96.51% of revenue, down 0.35pct year on year; domestic revenue was 2,696 billion yuan, up 16.06% year on year (yoy +4.08% in 2022), accounting for 3.49% of revenue, up 0.35 pct year on year.
The slight decline in gross profit margin and net profit margin was due to changes in market competition and adjustments in the company's product sales structure. The overall fluctuation was within a reasonable range. In 2023, the company achieved a gross margin level of 19.60%, a year-on-year decrease of 1.04pct; achieved a net margin level of 4.77%, a year-on-year decrease of 0.29pct. We believe that the overall gross margin fluctuation is within a reasonable range, mainly due to changes in market competition trends and adjustments in the company's product sales structure. By product, in 2023, the company's ICT infrastructure and services achieved a gross margin level of 25.58%, a year-on-year decrease of 2.15 pct. IT product distribution and supply chain services achieved a gross margin level of 6.40%, a year-on-year decrease of 0.40 pct.
The four-item fee rate increased slightly by 0.59 pct in 2023, and the management fee rate is expected to decline in 2024.
In 2023, the company's four expense ratios were 15.65%, with a slight increase of 0.59 pct. Among them, sales expenses/management expenses/R&D expenses/financial expenses were +0.84%/+6.50%/+21.74%, sales expenses rate/ management expenses rate/ R&D cost rate/ financial expense ratios were 5.55%/1.80%/7.30%/1.00%, respectively, -0.19pct/+0.14pct/+0.14pct. Management expenses increased rapidly year-on-year This is mainly due to the increase in dismissal benefits in Xinhua's third year. 2024Q1's four-item expense ratio was 15.37%, a year-on-year decrease of 1.73 pct.
Operating cash flow was under pressure in the short term due to an increase in payment for the 3rd Xinhua purchase, and there were plenty of orders in hand. 1) In terms of operating cash flow: The company's net operating cash flow in 2023 was -1,857 billion yuan, a year-on-year decrease of 146.22%, mainly due to increased procurement payments in Xinhua's third-tier purchases. 2) Inventory: The company's inventory balance in 2023 was 27.935 billion yuan, up 37.78% year on year, mainly due to an increase in raw material reserves in Xinhua and an increase in inventory that has not yet met the revenue recognition conditions. Among them, the book value of inventory products and issued products was 14.432 billion yuan, an increase of 39.40% year on year. 3) In terms of contract liabilities: The company's contract debt balance in 2023 was 12.039 billion yuan, an increase of 44.44% over the previous year, mainly due to the increase in Xinhua's third business.
By comprehensively deepening “AI in ALL”, it is expected that it will continue to benefit from the resonance between overseas computing power and domestic computing power. In 2023, the company released AI full-chain products and solutions such as G7 series modular multi-heterogeneous computing power servers, intelligent computing network solutions, S12500 series AI computing power cluster switches, Aofei computing power platform 3.0, and the Lingxi Big Model. Looking ahead to 2024, the North American cloud vendor 24Q1 Capex will increase year-on-year, and guide that it will continue to increase the scale of investment in cloud and artificial intelligence infrastructure in the future; domestic Guangdong, Shanghai, Beijing, etc. successively released implementation plans for computing power infrastructure construction, clarifying intelligent computing development goals and domestic AI computing power equipment needs It is expected to grow rapidly. In January 2024, the company's AIGC intelligent computing center was officially launched. The first phase has deployed 808P intelligent computing power, and 1,500P will continue to be launched; in March 2024, Xinhua and Intel released the H3CuNiServer R6900 G6 large model fine-tuning and inference solution to comprehensively reduce the application cost of AI inference scenarios. At the same time, the company actively adapts to domestic GPU chips. It is expected that the GPU supply problems that have arisen in 2023 will be further mitigated, thereby fully benefiting from the resonance of overseas and domestic computing power.
Focus on overseas markets and continue to strengthen the second growth curve. In 2023, Xinhua 3's international business growth rate increased 10.11 pct year-on-year. 1) In terms of mature markets: In 2023, Xinhua 3 achieved double-digit revenue growth in mature markets such as Japan, helping the digital transformation and upgrading of many key industries; 2) Key market aspects: In 2023, Xinhua 3 achieved significant growth in key markets such as Southeast Asia, Central Asia, the Middle East, Africa, and Latin America, and cooperated extensively with local governments, transactions, medical care, operators, enterprises, etc. 3) In terms of potential markets: In 2024, the company plans to increase investment and market layout in potential markets such as Europe, set up new regional offices in strategic node cities such as Barcelona, take root in the Spanish market and expand to other European countries. It is expected to build a new growth curve for the company in the future.
Investment advice: Leading domestic ICT sector, “cloud-network-security-storage-terminal” full-stack layout, simultaneous development of government and enterprises+operators+overseas markets, and broad room for subsequent growth. Excluding H3C's 49% shareholding, the company's net profit due to mother in 2024-2026 is estimated to be 2,375 billion yuan, 2,862 billion yuan, and 3.42 billion yuan respectively, corresponding to PE of 25.4 times, 21.0 times, and 17.6 times, respectively, maintaining the “Highly Recommended” rating.
Risk warning: The digital transformation of the industry falls short of expectations, the development of cloud computing falls short of expectations, and operator investment falls short of expectations.