Incidents:

On April 30, 2024, the company released its 2023 annual report and 2024 quarterly report: in 2023, the company achieved revenue of 13.42 billion yuan, -4.33%; net profit to mother - 977 million yuan, profit of 120 million yuan for the same period in 2022; 2024Q1, the company achieved revenue of 2,663 billion yuan, +21.13% year over year; net profit to mother - 250 million yuan, for the same period of 2022 - 305 million yuan, to reduce losses.

Investment highlights:

2024Q1 revenue +21% year over year, profit side achieved loss reduction

In 2023, the company's sales/management/R&D expense ratios were 4.79%/6.59%/10.15%, respectively, compared to +1.04/-0.13/+0.73pct. The increase in sales expenses was mainly due to subsidiaries' market expansion, labor cost growth, and revenue-related after-sales service fees.

In 2023, the decline in the company's total profit was mainly due to: ① policy fluctuations in the Xinchuang market, and the system equipment business was affected by factors such as price review and tax exemption policy changes, and profit margins were severely compressed; ② the decline in investment income: participating companies were affected by the economic downturn, and revenue and profit declined, affecting the company's overall earnings; ③ increased profit and loss due to high “two gold” enterprises.

2024Q1, the company's revenue was 2,663 billion yuan, +21.13% year over year; net profit to mother - 250 million yuan, same period in 2022 - 305 million yuan, achieved loss reduction. 2024Q1, the company's sales/management/R&D expense ratios were 5.52%/4.42%/11.77%, respectively, compared to -1.05/-5.36/-3.56pct. The decline in management expenses was mainly due to recovering viable rights that had expired in phase II stock options corresponding to amortized equity incentive fees.

The server business built “one master and multiple support” and successfully released the first AI server 1) Computing industry (accounting for 62%): In 2023, revenue was 8.286 billion yuan, -3.85% year over year; gross profit margin was 16.34%, -4.80pct year on year. In 2023, the demand of the Party, Government, and Xinchuang fell short of expectations. The growth in the Xinchuang market came mostly from server products, and the terminal market showed a downward trend. In the server field, the company developed the “Pengteng as main+others as supplement” strategy, completed the establishment of 17 projects along the five technology routes of Feiteng, Haiguang, Kunpeng, Yizhi, and Intel; built the first AI server, which was ordered by Weihai for 20 units. In the field of smart terminals, the Feiteng D2000 Battle Edition, Mega Core notebook, and standard Qingsong motherboard products are sold on the shelves.

2) System equipment (accounting for 32%): In 2023, revenue was 4.300 billion yuan, -5.07% YoY; gross profit margin 27.72%, YoY -1.57pct. In 2023, the system equipment market continued to grow, and market-based competition further intensified. As work continues to be carried out in depth, such as equipment standardization, etc., it has led to a decline in the type and quantity of demand for some equipment, compounding the impact of policies such as equipment price review, and further reducing profit margins.

However, the company has continuously optimized its business structure, consolidated business capabilities, participated in many important models, key scientific research and production tasks, and won bids for major projects such as military collection and Tiantong simultaneous integrated equipment; specialty energy products have formed a new pattern of full entry into multiple customer markets.

2023H2 Feiteng's revenue is growing rapidly, and the S5000C+D2000 volume can be expected 1) Feiteng 2023H2's revenue is growing rapidly. In 2023, Feiteng's revenue exceeded 1.9 billion yuan, +18% year-on-year, and 2023H1 revenue was 550 million yuan. It is expected that 2023H2 revenue will be about 1.4 billion yuan, about double the first half of the year+; R&D investment will exceed 1 billion yuan, +25% year-on-year, and the number of authorized patents will increase 72.9% year over year; cumulative chip sales volume will exceed 7.5 million pieces+.

2) Tengyun's S5000C server liquid cooling solution was released, and China Mobile cooperated with Feiteng to develop its own S5000C server. In April 2024, Feitengyun's S5000C server liquid cooling solution was officially released, and the main frequency was increased by 20% compared to the standard chip. In April, China Mobile developed its own 5G base station server based on Feiteng's latest generation Tengyun S5000C-M high-performance server CPU.

We believe that in 2024, Feiteng S5000C servers are expected to be shipped in batches, or drive Feiteng's performance to continue to grow.

3) Tengrui D2000 won the bid for procurement by large state-owned banks, and its share continued to increase. In April, a large state-owned bank announced the tender results for the 2024 desktop procurement project. Tens of thousands of desktop terminals based on the Feiteng Tengrui D2000 processor won the bid. It had the largest share in the bank's desktop terminal procurement, and its market share increased significantly over the same period last year.

Profit forecast and investment rating: The company is the main force in the computing industry under China Electronics and will benefit from the high-quality development of the autonomous intelligent computing industry for a long time. We expect the company's revenue for 2024-2026 to be 155.49/187.88/21.654 billion yuan, respectively, net profit to mother of 1.09/3.14/517 million yuan, EPS 0.03/0.16 yuan/share, respectively. The PS corresponding to the current stock price is 1.98/1.63/1.42 X, respectively, maintaining a “buy” rating.

Risk warning: Macroeconomics affects downstream demand, Xinchuang's progress falls short of expectations, technological iteration and upgrading falls short of expectations, market competition intensifies, and the game between China and the US intensifies.