IFF announced its 2024 semi-annual results. The company 1H24 achieved revenue of 226.1 billion yuan, an increase of 28.7% year on year; net profit to mother was 8.7 billion yuan, up 22.0% year on year; after deducting non-net profit of 8.5 billion yuan, an increase of 13.2% year on year. Looking at a single quarter, 2Q24 achieved revenue of 147.4 billion yuan, up 46.1% year on year, up 24.2% month on month; net profit to mother was 4.55 billion yuan, up 12.9% year on year, up 8.8% month on month.

Benefiting from increased demand for cloud infrastructure, AI server business is growing strongly. Leading cloud service providers are increasing their investment in AI, and demand for AI servers continues to grow. The company provides complete solutions, has a global diversified production capacity layout, and has high visibility of downstream orders. In 1H24, cloud computing revenue increased 60% year over year, and cloud service provider revenue accounted for 47%, up 5 pct year on year; AI servers accounted for 43% of server revenue each quarter, and revenue increased by more than 230% year over year.

Thanks to a boost in AI demand, high-speed switches are growing rapidly. Rapid growth in data center infrastructure is driving iterative demand for switch performance. With the advantages of intelligent manufacturing and responsiveness, the company's market share continues to increase. The communications and mobile network equipment business increased 20% year over year in Q2, and revenue from 400G and 800G high-speed switches related to AI servers increased 70% year over year.

Seize opportunities in the digital economy and AI development, and actively invest in technology research and development. The company thoroughly lays out the core technology of the digital economy and is leading the world in the core business of cloud, network, terminal, and industrial Internet. Adhering to the concept of “data-driven, green development”, we work with top global customers to actively increase investment in AI research and development. 1H24, the company invested 4.876 billion yuan in R&D, and more than 0.035 million R&D technicians.

The industrial Internet accelerates empowerment, and “lighthouse factories” lead the transformation of the manufacturing industry. China's industrial Internet has entered a period of rapid growth with comprehensive promotion. As the world's leading industrial Internet overall solution service provider, the company has built a total of 9 lighthouse factories, focusing on the “integration of the four modernizations” of automation, robotics, digitalization, and intelligence.

The “2+2” strategy continues to be deployed to create new advantages in the field of industrial AI. The company actively invests in upstream and downstream high-quality innovative enterprises through strategic mergers and acquisitions, promotes the development and innovation of the AI field and core products through strategic cooperation and joint market segments, and continues to enhance the driving force of the “intelligent manufacturing+AI” dual engine. The company strengthens cloud computing through strategic investment and increases the depth of “big data+robotics” scenarios; through mergers and acquisitions in the fields of AI servers, semiconductors, robotics, new energy, medical devices, etc., the company expands the breadth of “big data+robotics” scenarios to create a new competitive advantage with multiple scenarios and wide applications in the field of industrial AI.

Investment advice: Benefiting from the increase in computing power demand and the significant increase in network upgrade demand under the digital economy wave, the company's product structure optimization is expected to bring about an overall improvement in the quality of the main business and further optimization of profit levels. We expect the company's operating income to be 558.6/652.2/736.1 billion yuan in 24-26, respectively, and net profit to mother of 26/36.5/41.9 billion yuan respectively; corresponding to the closing price on August 14, 2024, P/E will be 16x/12x/10x, respectively, maintained” Recommended” ratings.

Risk warning: Downstream demand falls short of expectations, new product development progress falls short of expectations, new product release speed falls short of expectations, risk of exchange rate fluctuations.