As a core partner of Huawei, the company is actively transforming the “hardware+software+application” one-stop supplier, expanding the basic hardware platform layout, improving Huawei's ecosystem business, and using the digital innovation business as a strategic growth point, which is expected to open up room for growth, cover for the first time, and give it a “highly recommended” investment rating.
China's leading comprehensive digital technology service provider. The company has long provided end-to-end digital innovation business services, general technical services and digital operation services for customers in various industries such as communication equipment, Internet services, finance, high technology and manufacturing. According to the company's official website, with deep industry accumulation, the company has served more than 1,100 domestic and foreign customers in more than 10 important industries, of which more than 230 customers are the world's top 500 or China's top 500 companies. In 2018-2023, the company's operating income CAGR reached 13.70%, net profit CAGR to mother reached 9.69%, and overall performance maintained a steady growth trend.
The transformation strategy is beginning to bear fruit, and digital innovation businesses and strategic emerging industries contribute business growth points. By business type, the company comprehensively deepens digital innovation business service capabilities such as cloud intelligence, open source Hongmeng/Oula/Gauss, industrial Internet, enterprise management software, etc., to drive the revenue share of digital innovation services (digital technology services, consulting and solutions) with high added value to increase year by year, from 26.91% in 2018 to 47.48% in 2023; while the share of general technology services with relatively low gross margin of the company declined year by year, falling from 68.03% in 2018 to 44.09% in 2023. By industry, the communications equipment industry contributes the largest share of revenue and has a relatively high gross margin. In 2023, it achieved revenue of 7.054 billion yuan, accounting for 40.12%. The main company is one of the core suppliers of Huawei and its major ecosystem companies, and the breadth and depth of cooperation with it has further increased. In 2023, strategic emerging industries (fintech, smart cars, digital energy, etc.) achieved revenue of 6.411 billion yuan, accounting for 36.47% of revenue, and gradually became a new support point for business growth.
Partnering with Huawei for more than ten years, we have opened up a comprehensive Hongmeng/Oula/Gauss layout. The company's cooperation with Huawei began in 2006, and gradually grew from a pure IT service company to a supplier with comprehensive service capabilities such as consulting, digital planning, solution creation, delivery and operation. It is one of Huawei's “Diamond Level Partners”, and has an in-depth layout around ecological fields such as HUAWEI CLOUD, Open Source Hongmeng, Open Source Eula, and Open Source Gauss.
From the company's perspective, according to the company's prospectus, from 2018 to 2021 H1, Huawei was the company's largest customer; in 2018-2023, the company's revenue from the largest customer continued to rise, with a CAGR of 6.77%. Revenue from the largest customer in 2023 was 6.437 billion yuan, accounting for 36.61% of the company's revenue. In the context of the booming development of the HUAWEI Hongmeng/Eula/Gauss ecosystem, the company will fully benefit as a core partner of Huawei.
With the acquisition of Tongfang Computer, we are actively transforming a “hardware+software+application” one-stop supplier, and the development of AI PCs can be expected. The company completed the acquisition of Tongfang Computer and Tongfang International at the end of 2023. Among them, Tongfang Computer launched a number of complete machine products based on the Kunpeng Technology Route and Shengteng Technology Route. According to the official account of Softcom Computing (Tongfang Computer), Tongfang Xinchuang Business ranked in the top three comprehensive market share for three consecutive years, and also laid out full-stack AI server products and solutions for the cloud, edge, and end. The company acquired Tongfang Computer to expand the basic hardware platform and combine the basic software platform with open source Hongmeng, open source Euler, open source Gauss, etc. as the core to provide one-stop solutions and products for customers in the finance, telecommunications, manufacturing, central state-owned enterprises and other industries. Tongfang International owns the consumer computer brand MECHREVO (MECHREVO). According to big e-commerce statistics from Whale Staff, the Mechanical Revolution brand ranked second in the 2023 game book bestseller list, with annual sales of about 700,000, with annual sales of nearly 4.6 billion dollars. We believe that the acquisition of Machinery Revolution has further deepened the accumulation of Softcom's power on the end side, and is expected to occupy a leading position in the AI PC wave.
First coverage, giving a “Highly Recommended” investment rating. The company's digital technology service business has stable relationships with major customers, and the breadth and depth of cooperation continues to grow. The transformation strategy is beginning to bear fruit, and the overall performance has maintained a steady growth trend. The company has worked with Huawei for more than ten years and acquired Tongfang Computer to actively transform a “hardware+software+application” one-stop supplier, which will benefit from the booming development of the Huawei ecosystem and the wave of AI PCs. It is expected to achieve net profit of 6.98/8.45/1,023 billion yuan in 24-26, an increase of 31%/21%/21% year-on-year. It is covered for the first time, giving it a “Highly Recommended” investment rating.
Risk warning: Policy support such as Xinchuang falls short of expectations; technological development in the cloud computing and AI industries falls short of expectations; industry competition intensifies; technological innovation falls short of expectations