Key points of investment
In 2023, the company's holding subsidiary Xinhuasan achieved revenue of 51.94 billion yuan, an increase of 4.3% over the previous year, and achieved net profit of 3.41 billion yuan. Its domestic operators, international business, and H3C brand products and services business performed well. In 2023, the company comprehensively laid out the AIGC opening strategy, further strengthened cooperation with operators in the fields of ICT equipment, cloud computing and AI, released a new overseas strategy, and accelerated overseas market expansion.
Xinhua's 3Q1 business data is strong
In 2023, Ziguang Co., Ltd. achieved operating income of 77.31 billion yuan, up 4.4% year on year, and realized net profit of 210 billion yuan, down 2.5% year on year, mainly affected by the macroeconomic cycle. In 2023, Xinhua 3, an important holding subsidiary of Ziguang Co., Ltd. achieved operating income of 51.94 billion yuan, an increase of 4.3% year on year, and achieved net profit of 3.41 billion yuan. Xinhua's three businesses are progressing well, mainly due to the good performance of domestic operators, international businesses, and H3C brand products and services. Revenue increased 11.8%/19.7%/62.0% year-on-year respectively in '23. In 2023, the company achieved a gross sales margin of 19.60%, a year-on-year decline of 1.04pct, a net sales margin of 4.77%, and a year-on-year decline of 0.28pct.
In the first quarter of 2024, the company achieved operating income of 17.01 billion yuan, a year-on-year increase of 2.89%, and realized net profit of 410 million yuan to mother, a year-on-year decrease of 5.8%. In the Q1 quarter, the holding subsidiary Xinhua 3 achieved operating income of 12.132 billion yuan, an increase of 14% over the previous year; realized net profit of 754 million yuan, an increase of 8.27% over the previous year. The business progressed well in the Q1 quarter of Xinhua. 24Q1 achieved a gross sales margin of 19.97%, an increase of 1.14pct over the previous month, a net sales margin of 4.11%, and a decrease of 0.3 pct over the previous month.
In terms of operating expense ratio, 24Q1 company's sales/management/R&D expenses rates were 6.20%/1.42%/7.31%, respectively. The year-on-year change was -1.13pct/+0.01pct/ -1.14pct, and the company's expense ratio was generally manageable. In the Q1 quarter, under the leadership of the “Intelligent Computing Strategy”, the company further expanded the “1+N” industry smart application of Baiye Lingxi private domain model+selected general and industry segmentation models. We expect the company to continue to promote the layout of the AIGC field in '24.
The company comprehensively promotes the AIGC layout
In 2023, the company launched the “AIGC Open Strategy” to comprehensively lay out the AIGC business. The company released a series of products such as the “Baiye Lingxi LinSeer” private domain model, the Baiye Linseer large model enabling platform, and the Baiye Lingxi AI assistant. In the data center field, the company launched the world's first single-chip 51.2T 800G CPO silicon optical data center switch, which is suitable for business scenarios such as AIGC clusters or high-performance core switching in data centers. It supports 64 800G ports and integrates CPO silicon light technology, liquid cooling design, and intelligent lossless technology. Fully upgrade the Aofei computing power platform to achieve unified management and intelligent scheduling of heterogeneous and diverse computing power. The H3CuniServer R5350 G6 server is aimed at large-scale AI training and inference scenarios. It can improve computing performance by 90% and increase the number of cores by 50%, and supports various artificial intelligence acceleration cards such as GPU/NPU/XPU. In 2024, the company is expected to continue to promote its business layout in the AIGC field.
Strengthen cooperation with domestic operators
In 2023, the business of the three new operators progressed strongly, deepening the “three clouds, two networks” strategy. In terms of ICT equipment collection, Xinhua 3 won the bid for a number of major collection projects, including China Mobile, China Telecom, and China Unicom, and is at the forefront of product lines such as data center switches, servers, and firewalls. In the field of cloud computing and AI, Xinhua 3 participated in the construction of China Mobile's new intelligent computing center and won the bid for China Telecom's AI computing power server procurement project.
Xinhua 3 accelerates overseas market expansion
In 2023, Xinhua released a new overseas strategy to accelerate overseas market expansion. In mature markets such as Japan, revenue achieved double-digit growth; in key markets such as Southeast Asia, Central Asia, the Middle East, Africa, and Latin America, it achieved significant growth, and cooperated extensively with local governments, education, healthcare, operators, enterprises, etc. in the field of digital transformation; in potential markets such as Europe, the company further strengthened its business layout by setting up new regional offices in strategic European cities such as Barcelona.
Profit forecasting and valuation
We expect the company's net profit to be 2.4 billion yuan, 2.9 billion yuan, and 3.3 billion yuan, respectively, corresponding to 24-26 PE multiples of 25, 21, and 18 times, respectively. We maintain a “buy” rating.
Risk warning
Overseas market expansion fell short of expectations, cooperation with HPE fell short of expectations, product development and promotion fell short of expectations, and parts acquisition for some of the company's core products fell short of expectations.