IFF publishes its 2024 semi-annual report. IFF 24H1 achieved operating income of 266.09 billion yuan, +28.7% year over year, net profit of 8.74 billion yuan, +22.0% year over year; looking at the 24Q2 single quarter, it achieved operating income of 147.4 billion yuan, +46.1% year over month, +24.2% month on month, net profit 4.55 billion yuan year on month, +12.9% year on month, and +8.8% month on month. The increase in the company's performance was mainly due to strong demand growth for AI servers. The company covered the entire AI industry chain With vertical integration capabilities, cloud computing business revenue growth is strong.

[Cloud Computing] Demand for AI servers is hot, and the share of AI revenue is increasing. TrendForce Jibang Consulting estimates that AI server 24Q2 shipments will increase by nearly 20% quarterly to 1.67 million units, with an annual growth rate of 41.5%. Looking at the whole year, AI servers are estimated to account for 12.2% of total server shipments, +3.4 pcts year over year, and AI server output value will reach 187 billion US dollars, +69% year over year, accounting for up to 65% of total servers. The company expects AI to contribute 40% of the company's total cloud computing revenue in 2024, and AI servers will account for 40% of the global market share.

2024H1 cloud computing revenue was +60% year over year, with cloud service provider revenue accounting for 47%, +5pcts year on year; AI server revenue increased by more than 230% year over year, accounting for 43% of overall server revenue, and +16% year over year. 24Q2 cloud computing revenue increased by more than 70% year on year, up more than 30% year on month, accounting for 55% of total revenue; AI server revenue increased by more than 270% year on year and more than 60% month on month, accounting for 46% of overall server revenue, and continued to increase quarter by quarter. The company's production capacity for next-generation AI servers is already sufficient, and downstream orders are highly visible. In addition, the company focuses on AI-related advanced heat dissipation, and various technologies and solutions such as next-generation AI servers and liquid cooling cabinets jointly developed with customers.

[Communications and Mobile Network Equipment] 24H1's revenue increased by high number of units year-on-year, +20% year-on-year in 24Q2, and +70% year-on-year revenue from 400G and 800G high-speed switches related to AI servers. 24H1's overall 400/800G high-speed switch revenue was +30% year-on-year, and 800G switches began shipping in the first half of the year. The company's high-speed switch product portfolio covers multiple deployments of Ethernet, Infiniband, and NVLink Switches, which is expected to contribute to growth throughout the year.

With the accelerated development of AI, smartphones have ushered in a new wave of switching devices. According to IDC's forecast, global shipments of next-generation AI phones will reach 0.17 billion units in 2024, accounting for 15% of total smartphone shipments.

The share of AI phones in the Chinese market will also continue to grow rapidly, accounting for more than 50% by 2027. As a “double leading” enterprise in cloud computing and precision mechanical components, IFF has mastered important materials and process technologies for related businesses, and will benefit from the multiple opportunities brought by AI development in the future.

Profit forecast and investment advice: We expect revenue for 2024/2025/2026 to be 549.3/645.8/742.6 billion yuan, up 15.31%/17.56%/15.00% year on year, net profit to mother of 25.8/31/37.2 billion yuan, up 22.67%/20.27%/19.99% year on year. The current stock price corresponding to 2024/2025/2026 PE is 16/13/11X, respectively, maintaining the “Highly Recommended” rating .

Risk warning: AI servers are not progressing as expected; macroeconomic risks; trade frictions are intensifying.