Event Overview:
1) Recently, Softcom Power held a new product launch event for intelligent products and services in Beijing, and launched products such as the new Enterprise Intelligence Knowledge Center and SwanLink AI intelligent recognition application.
2) Recently, Softcom Power released the “2023 Annual Report” and the “2024 First Quarter Report”.
In 2023, the company achieved operating income of 17.581 billion yuan, a year-on-year decrease of 7.97%; realized net profit of 534 million yuan, a year-on-year decrease of 45.15%; net profit after deducting non-return to mother was 462 million yuan, a year-on-year decrease of 44.89%. In the first quarter of 2024, the company achieved operating income of 5.449 billion yuan, a year-on-year increase of 29.65%; net profit loss to mother of 277 million yuan, net profit loss of 284 million yuan after deducting non-return net profit loss.
Q1 Revenue grew rapidly, strengthening digital capabilities led by consulting. In 2023, the company achieved revenue of 17.581 billion yuan and net profit of 534 million yuan. As the core engine of the company's transformation and upgrading, the digital innovation business and strategic emerging industries entered a steady development stage. In 2023, the digital innovation business achieved revenue of 8.348 billion yuan, accounting for 47.48% of revenue, and strategic emerging industries achieved revenue of 6.411 billion yuan, accounting for 36.47% of revenue. By industry, ① The revenue of the communications equipment industry is 7.054 billion yuan (YoY -18.35%). ② Fintech industry revenue of 4,042 billion yuan (YoY +6.31%). ③ Internet service industry revenue of 3.287 billion yuan (YoY -9.34%). ④ High-tech and manufacturing revenue of 2,372 billion yuan (YoY +1.66%). By product, general technology services achieved revenue of 7.751 billion yuan (YoY -16.43%), digital technology services achieved revenue of 7.029 billion yuan (YoY -2.68%), consulting and solutions revenue of 1,319 billion yuan (YoY +24.08%), and digital operation services revenue of 1.48 billion yuan (YoY -4%). In 2023, the company's sales/management/R&D expenses ratio was 3.29%/7.82%/5.44%, respectively, +0.18/-0.1pct.
In the first quarter of 2024, 2024Q1 achieved operating income of 5.449 billion yuan (YoY +29.65%) and net profit of 277 million yuan, a year-on-year loss, mainly due to the completion of Tongfang Computer and Tongfang international mergers and acquisitions at the end of January 2024, increased costs and expenses such as initial business integration and organizational consolidation, and increased interest expenses on mergers and acquisitions loans, compounded by fluctuating market demand during the Spring Festival, price competition from core customers, and the expiration of value-added tax deduction policies.
The company's strategic customer base remains stable, and the size and number of major customers continues to increase. Facing the domestic market, the company completed the marketing capacity layout in more than 40 important cities in six major regions across the country, and launched a development strategy for Southeast Asia and the Middle East for the international market.
Acquire Tongfang's core assets to build a Huawei ecosystem integrating software and hardware
In terms of open source Hongmeng, the subsidiary Honghu Wanlian built SwanLinkOS, the industry's first operating system with a cross-instruction set, released a full-stack autonomous technology mount solution, reached strategic cooperation with many leading companies, and successfully commercialized in the coal mine, power and other industries; in terms of open source Euler, Softcom Power's enterprise server operating system Tianhe OS (isSEOS) completed compatibility adaptation with mainstream domestic server CPU/database/middleware manufacturers, released a one-stop service tool chain and operation and maintenance platform tool, successfully won the bid for China Mobile's “Cloud Intelligent Center 2023” -Second section of the “2024 Provincial Special Company Operating System Migration Technology Service Project”; In terms of open source Gauss, the company developed its own commercial distribution version of the database Tianhe DB (isseDB) based on the OpenGauss core, and launched products such as the Tianhe multi-database management platform and various joint solutions such as insurance and fund management based on the Tianhe database.
The merger and acquisition of Tongfang Computer and Tongfang International was completed in January 2024. The acquired assets focus on R&D, manufacturing, sales and supporting technical services for PC, server and terminal products in Xinchuang and the commercial market. It is an ecological partner of Huawei's Kunpeng, Shengteng, and Storage product lines. We believe that in the future, Softcom Power is expected to form an integrated software and hardware product capability of “Tongfang PC+Hongmeng OS, Tongfang Server+Euler OS+ Gauss database, Tongfang Machine+HUAWEI Cloud+MetaERP” to achieve a closed loop in the industry from hardware computing power to software applications, and further build the entire industry chain capability and ecological partnership of Huawei's “Kunpeng + Shengteng+ Hongmeng + Gaus+ Gaus+ Cloud Service”.
Investment advice
Softcom Power is a core service provider in the information technology field. It is also an important ecological partner of Huawei. It is expected to fully benefit in the context of self-reliance and self-improvement in technology and the full return of Huawei. This acquisition has laid a solid foundation and opened up more space for the company's subsequent strategic layout and business development. We expect the company's revenue for 2024-2026 to be 288.53/332.51/38.811 billion yuan, respectively, and net profit to mother of 7.80/10.02/1.07 billion yuan, respectively. We selected companies related to computing power as comparable targets. The target price for 6 months is 49.12 yuan, which is equivalent to a dynamic price-earnings ratio of 60 times in 2024, maintaining a buy-A investment rating.
Risk warning:
Management risks due to rising labor costs and continuous expansion of scale, risk of customer concentration, etc.