Core views

The company's overall operation remains steady. In terms of the individual market, against the backdrop of slowing traffic growth, the company is strengthening the integrated operation of applications, rights, and terminals to maintain a stable individual market; in the household market, while promoting the continuous penetration of gigabit broadband, it strengthens the “smart home+ content” drive to enhance the comprehensive ARPU of the home market; in the government and enterprise market, it continues to cultivate the industry to accumulate core capabilities and improve the profit level of B-side projects. Based on the 72% dividend ratio (the company guidelines increase the dividend ratio to 75% within three years), the company's current dividend ratio is about 7% for H shares and 4.5% for A shares, and the dividend return is still attractive.

occurrences

The company released its 2024 semi-annual report. Revenue for the first half of 2024 reached 546.7 billion yuan, up 3.0% year on year, including main business revenue of 463.6 billion yuan, up 2.5% year on year, net profit to mother of 80.2 billion yuan, up 5.3% year on year, capital expenditure of 64 billion yuan, and free cash flow of 67.4 billion yuan.

Brief review

1. Adhere to a high-quality development strategy, and revenue from digital transformation is growing rapidly.

In the first half of 2024, revenue reached 546.7 billion yuan, up 3.0% year on year. Among them, main business revenue was 463.6 billion yuan, up 2.5% year on year, and net profit to mother was 80.2 billion yuan, up 5.3% year on year. Looking at a single quarter, 2024Q2 achieved revenue of 283 billion yuan, up 1.09% year on year, main business revenue of 244.3 billion yuan, up 0.8% year on year, and net profit to mother of 50.6 billion yuan, up 5.2 percent year on year. Under the complex external environment and many difficult challenges, traditional communication service business operations faced certain pressure. The company actively promoted digital transformation. The “second curve” digital transformation revenue reached 147.1 billion yuan, an increase of 11.0% over the previous year, accounting for 31.7% of the main business revenue, an increase of 2.4 pcts over the same period last year.

Furthermore, thanks to the company's good cost management, the overall profit level has maintained good growth.

In the first half of 2024, the company's main business cost was 296.8 billion yuan, down 1.2% year on year, accounting for 54.3% of revenue. Among them, network operation and support expenses fell 0.5% year on year, and depreciation and amortization fell 7.1% year on year. In terms of expenses, sales expenses were 29.2 billion yuan, up 8.9% year on year, mainly due to increased marketing development such as channel operation and customer service; management expenses were 27.3 billion yuan, down 1.0% year on year; R&D expenses were 12 billion yuan, up 40.6% year on year, mainly due to the company continuing to increase investment in R&D, strengthen technical research and core capacity building, and focus on business development.

2. The growth of the individual market is under pressure to actively expand households, government enterprises, and emerging markets.

In the first half of 2024, individual market revenue was 255.179 billion yuan, down 1.6% year on year, and the mobile ARPU value was 51 yuan, down 1.4 yuan. Overall, the individual market was under pressure. The main reason was that DOU growth slowed, while traffic tariffs still declined slightly (24H1 traffic tariff was about 2.53 yuan/GB, a year-on-year decrease of about 5%). The mobile business was mainly driven by value-added services such as personal cloud drives and equity income. Household market revenue was 69.8 billion yuan, up 7.5% year on year. The penetration rate of gigabit home broadband customers was 33.5%, up 3.5 pct from the end of 2023. Driven by mobile HD, intelligent networking, home security, FTTR and other businesses, the comprehensive ARPU for household customers reached 43.4 yuan, an increase of 0.2% year on year. Government and enterprise market revenue reached 112 billion yuan, up 7.3% year on year. The number of government and enterprise customers reached 30.38 million, a net increase of 2.01 million. The share of winning bids in the public tender market reached 18.4%, leading the industry. Mobile cloud revenue reached 50.4 billion yuan, up 19.3% year over year, with IaaS+PaaS revenue share ranking among the top five in the industry.

3. The share of capital expenditure in revenue fell below 20%, favoring computing network infrastructure.

Capital expenditure of 64 billion yuan was completed in the first half of 2024, the total investment in 5G networks was 31.4 billion yuan, and a total of more than 2.29 million 5G base stations were opened, including 0.705 million 700MHz5G base stations. The company increased its investment in computing power networks, reaching 8.2 EFLOPS (FP32), and the scale of intelligent computing power reached 19.6 EFLOPS (FP16). It laid out the first batch of 13 intelligent computing center nodes in the Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu and Chongqing, and built the world's first large-scale and broadest 400G all-optical backbone network. At the beginning of the year, the capital expenditure plan for 2024 was 173 billion yuan, and the current statement is adjusted to a capital expenditure of less than 173 billion yuan. In the first half of 2024, the company's free cash flow was 67.392 billion yuan, down 14.8% from the same period last year. This is expected to be related to poor repayment of some government and enterprise projects.

4. Profit prediction and investment advice.

The company's overall operation remains steady. In terms of the individual market, against the backdrop of slowing traffic growth, the company is strengthening the integrated operation of applications, rights, and terminals to maintain a stable individual market; in the household market, while promoting the continuous penetration of gigabit broadband, it strengthens the “smart home+ content” drive to enhance the comprehensive ARPU of the home market; in the government and enterprise market, it continues to cultivate the industry, accumulate core capabilities, and raise the profit level of B-side projects. We expect the company's net profit to be 139.048 billion yuan, 146.142 billion yuan, and 152.715 billion yuan in 2024-2026, corresponding PE is 15.5X, 14.8X, 14.1X, and PB is 1.6X, 1.6X, 1.5X. Based on the 72% dividend ratio (the company guidelines increase the dividend payout ratio to 75% within three years), the company's current dividend ratio is about 7% for H shares and 4.5% for A shares. The dividend return is still attractive, maintaining a “buy” rating.

6. Risk warning

Competition in the individual market intensified, and efforts to speed up and reduce fees increased again. 5G-related applications were scarce and traffic growth slowed; AI business development fell short of expectations; cloud computing fell short of expectations. Cloud computing was the development focus of the three telecom operators. In addition, other state-owned enterprises also deployed cloud computing, and there may be a risk that competition will intensify; the development of the data factor market is still being explored, and there are still major difficulties, such as data authorization and data pricing. The relevant technology is immature, and there is a risk of data leakage during the transaction process; data involving personal information is more sensitive and transactions Data property disputes may occur in the process; government and enterprise market revenue growth is under pressure; accounts receivable increase, impairment increases, free cash flow deteriorates, etc.