occurrences
On April 30, the company released its 2024 quarterly report. In Q1 of 2024, it achieved operating income of 118.688 billion yuan, +12.09% YoY, -19.55%; realized net profit attributable to mother of 4.185 billion yuan, +33.77%, 44.61% month-on-month; realized net profit without deduction of 4.272 billion yuan, +33.22%, and -6.01% month-on-month; gross sales margin was 7.64%, +0.28pcts YoY and +7.54pcts month-on-month.
On March 28, the company released its 2023 annual report. In 2023, it achieved operating income of 476.340 billion yuan, -6.94% year on year; realized net profit of 21.04 billion yuan, +4.82% year on year; realized net profit of 20.09 billion yuan without return to mother, +9.77% year on year; gross sales margin was 8.06%, +0.80 pcts year on year. By business segment, the company achieved operating revenue of 194.3.08/2789.76/1,646 billion yuan in the cloud computing/communications and mobile network equipment/ industrial Internet sector respectively in 2023, with gross margins of 5.08%/9.80%/49.81%, respectively, +1.12 pcts/ +0.55pcts/+1.94 pcts. Looking at Q4 alone, Q4 2023 achieved operating income of 147.522 billion yuan, -2.15% YoY, +20.88%; realized net profit of 7.555 billion yuan, -8.72% YoY, +19.48% month-on-month; net profit without return to mother of 6.676 billion yuan, -5.49% YoY, +11.33% month-on-month; gross sales margin was 0.1%, -0.2pcts YoY and -0.7pcts month-on-month.
Key points of investment
High demand for computing power has driven rapid growth in AI server shipments, and the company's Q1 AI server revenue has nearly tripled over the same period last year. With the rapid rise in upstream computing power construction and the rapid growth in downstream AI demand, the AI server market is growing rapidly. The popularity of ChatGPT has brought generative AI even more attention. According to MIC estimates, global AI server shipments exceeded 1.25 million units in 2023, an increase of more than 47% over the previous year, and increased to 1.94 million units in 2024. Meanwhile, capital expenditure for cloud service providers will increase significantly in 2024. The capital expenditure of the top four global cloud service providers has increased, which is expected to rise from US$140 billion in 2023 to more than US$200 billion in 2024. The company focuses on GPU modules, substrates, and back-end AI server design and system integration upstream of the AI industry value chain. With the high demand for AI servers around the world, the company achieved significant growth in AI server market share, which effectively promoted the increase in revenue, profit and profitability. In 24Q1, the company's cloud computing business revenue accounted for nearly 50% of total revenue.
AI servers account for nearly 40% of total server revenue. AI server revenue nearly tripled year over year, showing a nearly double digit increase; generative AI servers increased nearly 3 times year over year, and also showed a double digit ratio; general purpose servers achieved a double digit ratio increase year over year, and the single digit ratio increased month-on-month. In 2024, the company plans to launch a new generation of generative servers. Looking forward to the future, the company will continue to focus on the development of AI and cloud computing infrastructure products and technologies, improve the global production capacity layout, and actively increase investment in R&D.
Demand for generative AI high bandwidth is growing, driving the continuous development of optical communication equipment, and the company's high-speed switch and router business is growing rapidly. As data traffic increases, the development and deployment of high-bandwidth services requires more network equipment, and demand for optical communication equipment such as switches and routers has been further catalyzed. According to IDC's “2023 Internet Market Tracking Report”, the global online market size in 2023 was US$71.42 billion, an increase of 12.8% compared with last year. China's network market is 72.84 billion yuan, up 0.8% from last year. Among them, the switch and router markets increased by 0.7% and 7.2% respectively. IDC predicts that in 2024, with the increase in demand for large-scale networking in data centers and the improvement of the economic situation, demand for switches in China will increase, and the deployment trend of midrange and high-end routers will accelerate. The company has been deeply involved in the network communication industry for many years. Thanks to various factors such as intelligent manufacturing, the global market share exceeds 75%, and related business is growing rapidly. In 2023, the company's revenue from high-speed switches and routers increased quarterly, and the router business increased by double digits; mass production and delivery of 100G, 200G, 400G and other high-speed switches, with shipments of 200G and 400G switches increasing significantly, and 800G switches have also entered the NPI stage. It is expected to start increasing volume and contributing revenue this year, which is conducive to further optimizing the company's product structure.
Smart terminals are popular, and “lighthouse factories” are leading the transformation of the manufacturing industry. The global economy was sluggish in 2023, and the smartphone and wearables market experienced a recession. The power of AI and the release of innovative products will help drive a recovery in demand for consumer electronics products. According to DIGITIMES Research data, the 5G switch wave and demand for smart phones in emerging markets are expected to drive the recovery of the global smartphone market in 2024 and rise back to 1.14 billion units, which is expected to grow 5.4% year on year. The company has always been in a leading position in the market in shipments of high-end precision mechanical components for smart terminals and mobile wearables. The company achieves large-scale promotion through internal optimization and external empowerment. The company is not only the world's first AI server “lighthouse factory”, but also the world's first precision metalworking “lighthouse factory”. At the same time, the company added 2 new “lighthouse factories” to enable it: GAC Aian Guangzhou Plant and CITIC Special Steel's Wuxi Plant. By the end of 2023, the company had helped build 9 “lighthouse factories” and over 30 “smart factories”. In the future, the company will also use the lighthouse factory as a benchmark to continue to provide full-scene digital transformation services to different types of customers such as large, medium and small enterprises, parks and industrial clusters, continue to serve manufacturing enterprises using the industrial Internet and Industry 4.0 technology, and work with partners to accelerate digital intelligence transformation.
Investment advice
We expect the company to achieve revenue in 2024-2026, respectively
5569.37/6490.76 billion yuan, achieving net profit of 25.598/303.04/34.734 billion yuan. The closing price on June 6, 2024 corresponded to the company's 2024-2026 PE was 20/17/15 times, respectively, covered for the first time, giving it a “buy” rating.
Risk warning:
The macroeconomic recovery fell short of expectations, downstream demand fell short of expectations, the development of the AI industry fell short of expectations, and market competition intensified.