Incidents:
The company released its 2023 annual report, and achieved operating income of 77.308 billion yuan in 2023, up 4.39% year on year; net profit to mother reached 2.03 billion yuan, down 2.54% year on year; the company's holding subsidiary Xinhua 3 billion yuan achieved operating income of 51.939 billion yuan, up 4.27% year on year, and realized net profit of 3.41 billion yuan, down 8.6% year on year.
The company released its 2024 quarterly report. 2024Q1 achieved operating income of 17.06 billion yuan, a year-on-year increase of 2.89%; net profit of 414 million yuan; the holding subsidiary of the company, Xinhua 3, achieved operating income of 12.132 billion yuan, an increase of 14% over the previous year; and net profit to mother of 754 million yuan, an increase of 8.27% over the previous year.
1. Revenue side: Steady growth in the performance of core holding subsidiaries
The subsidiary Xinhua3's revenue in 2023 reached 51.939 billion yuan, up 4.27% year on year; achieved net profit of 3.41 billion yuan, down 8.6% year on year; implemented the “AI F R L” strategy to continuously empower customers in the three major markets to digitalize and intelligently transform and upgrade.
Domestic enterprise business progressed steadily, achieving revenue of 398.68 billion yuan, an increase of 1.86 percent over the previous year. It continues to deploy in the fields of digital government, digital finance, smart transportation, smart medical care, smart education, electricity and energy, smart enterprises, etc., and has successively won bids for important projects in various fields. In the field of digital government, it has successively won bids for smart city projects in Chengdu, Xiaoshan, Xianyang, Baoding, etc., and also launched large-scale “digital civil servant” government models to achieve large-scale implementation in many places; in the field of smart transportation, innovative products and solutions such as urban rail cloud DaaS and transportation industry AIGC solutions have successively won bids for subway and airport digitization projects in Shanghai, Qingdao, Wuhan, Guangdong, Sichuan, etc.; in the field of power and energy, the State Grid framework collection share maintains a leading position, winning the first share of the Sinopec Network framework procurement framework equipment project.
The domestic operator business momentum is strong, and the scale has grown rapidly. Revenue reached 9.869 billion yuan, an increase of 11.75% over the previous year.
In terms of ICT equipment collection, Xinhua 3 continues to win bids for three major operator-related projects, including data center switches, servers, and firewalls, further consolidating and increasing market share; in terms of government enterprises and new businesses, it actively helps operators build government cloud projects and provides secure brain products and services for operators' private security lines for government and enterprise affairs. In addition, China Mobile FTTR was shortlisted and won the bid for Jiangsu Mobile's FTTR all-optical networking equipment project in 2023.
The overall sales scale of the international business continues to expand, and efforts are being made to create a “second curve” of revenue growth. Revenue reached 2.02 billion yuan, up 19.70% year on year; revenue from H3C brand products and services was 1.41 billion yuan, up 62.04% year on year. According to the Securities Times Network, the company continues to deepen its global layout and rely on independent expansion strategies to achieve volume growth in key markets: in mature markets such as Japan, it has achieved double-digit revenue growth, achieved rapid growth in key markets such as Southeast Asia, Central Asia, the Middle East, and Africa, and increased investment in potential markets such as Europe to cultivate growth potential.
The subsidiary Ziguangyun continues to consolidate the three-dimensional capabilities of “going to the cloud and empowering wisdom with numbers” to help the industry transform to the cloud. Based on the “Cloud Intelligence Native” strategy, we continue to innovate in cloud products, services and solutions, comprehensively upgrade the Ziluan Cloud infrastructure, build a high-performance intelligent computing cloud platform, provide full-stack chip cloud solutions, and continuously win bids for multiple government cloud, enterprise cloud, smart city commercial bank projects and urban rail pattern projects. In 2023, we achieved revenue of 1,508 billion yuan, a slight increase over the previous year.
By product, ICT infrastructure and services grew steadily, with an increase in business share and a slight decrease in gross margin, achieving revenue of 51,506 billion yuan, a year-on-year increase of 10.15%, gross profit margin of 25.58%, a year-on-year decrease of 2.15 pcts; IT product distribution achieved revenue of 29.132 billion yuan, a year-on-year decrease of 9.83%, and a gross profit margin of 6.40%, a year-on-year decrease of 0.40 pct.
2. Continuing to benefit from the wave of digital transformation. The market share of many products continues to lead. According to the company's annual report, in 2023, the company ranked second in China's Ethernet switch, enterprise network switch, data center switch, and campus switch market share; China's enterprise network router market share continued to rank second; China's enterprise WLAN market share ranked first; China's X86 server market share remained second; China's GPU server market share ranked second; China's blade server market share ranked first; China's blade server market share ranked first; China's hyperconverged market share ranks second. The company has further expanded its leading edge through technological innovation and continued to consolidate the company's differentiated competitiveness on the core circuit of the digital economy.
3. Expense side and cash flow: The rate remained stable. Net operating cash flow was under pressure in 2020. The company's overall expense ratio was 15.64%, a slight increase of 0.59 pct over the previous year, and remained stable. Among them, the company's sales/management/ financial/ R&D expenses ratio was 5.55%/1.80%/1.00%/7.30%, year-on-year change of -0.20/+0.50/+0.14pct. Among them, the year-on-year increase in management expenses was mainly due to an increase in the subsidiary's Xinhua 3rd dismissal benefits.
In terms of R&D investment, the company invested 5.299 billion yuan in R&D in 2022, an increase of 7.16% over the previous year. The company continues to step up research and development of ICTG products, cloud and intelligent platforms and solutions.
In terms of cash flow, the ratio of cash to income increased, and net operating cash flow was under pressure. Cash revenue in 2023 was 1.29, up slightly from year on year (1.19 in 2022); due to the increase in purchasing payments from the subsidiary Xinhua Class III, the company's net operating cash flow turned negative in 23, which decreased by 146.22% year on year; net investment cash flow increased 1612.33% year on year.
4. Continue to increase R&D investment to build a solid digital platform for the full application of AIGC. Yunzhi continued to increase R&D investment. In 2023, it invested 5.643 billion yuan in R&D, an increase of 6.50% over the previous year; the total number of R&D personnel was 7,693, accounting for 40.10%, an increase of 5.73% over the previous year.
In 2003, the company grasped the rapid development trend of technology integration and AIGC technology, forwardly built a “cloud-network-security-storage-end” full-stack business layout, and continued to innovate technology and products around AIGC, computing power supply, high-quality networks, green energy efficiency, data parallelism, security and privacy, intelligent operation and maintenance, and successively launched a series of major products and solutions to build a solid Yunzhi native digital platform for the full application of AIGC.
In 2023, the company released a series of products such as the “Baiye Ling Xi L in S E R” private domain large model, Baiye Ling Xi AI assistant, etc., to build a full link, software and hardware end-to-end comprehensive solution from data governance, model training, inference deployment to application. In the China Academy of Information and Communications Technology's big model verification, the model development module was rated 4+, reaching the advanced level in China; Relying on the company's Oasis platform and Aofei computing power platform, combined with artificial intelligence servers and SeerFabric intelligent lossless solutions, High-performance storage and liquid-cooled data center products form an end-to-end intelligent computing solution; in addition, full-stack liquid cooling solutions have been launched to form a rich product portfolio, and a full range of G6 liquid-cooled DC switches have been released; in terms of intelligent connectivity, the world's first single-chip 800 G CPO silicon optical switch, high-end routers such as the CR16000-M8 and CRT19000-20, new Wi-F 7 products, 5G small base stations, etc.
In 2024Q1, under the leadership of the “Intelligent Computing Strategy”, the company continued to improve computing power and connect the “double cornerstone” full-stack capabilities, further expanded the “1+N” industry smart application of the company Baiye Ling Xi private domain model+ selected general and industry segmentation models, and continuously upgraded the “digital brain” to support the application needs of the AIGC industry with full-stack capabilities.
5. Investment suggestions:
As a leader in the digital solutions industry, the company continues to benefit from the digital transformation needs of Baixing and the industry. Performance is expected to recover steadily. At the same time, with the continuous promotion of AI applications, the company is expected to benefit as a related infrastructure manufacturer. Considering the reduction in distribution business, economic recovery falls short of expectations, and adjusted profit forecasts, it is expected that 2024-2026 will achieve revenue adjustments of 831.0/901.5/98.70 billion yuan respectively, and earnings per share will be adjusted from 1.16/1.46/N/A yuan to 0.87/1.02/1.20 yuan, respectively, corresponding to the closing price of 20.95 yuan/share on April 30, 2024, PE is 24.2/20.6/17.5 times, respectively, maintaining the “buy” rating.
6. Risk warning:
Digital transformation falls short of expectations; operators' investment in cloud computing falls short of expectations; risk of fluctuations in the cost of raw materials such as upstream chips.