Incidents:

On August 13, 2024, the company released its 2024 mid-year report: 2024H1. The company achieved revenue of 266.091 billion yuan, an increase of 28.69% year on year; net profit to mother was 8.739 billion yuan, an increase of 22.04% year on year. With 2024Q2, the company achieved revenue of 147.403 billion yuan, a year-on-year increase of 46.11%; net profit to mother was 4.554 billion yuan, an increase of 12.93% year-on-year.

Investment highlights:

Excluding exchange profit and loss in Q2, the total profit ratio of +25% year-on-year, the Blackwell series mass production is expected to drive a steady recovery in gross margin

2024H1, the company's gross margin was 6.73%, -0.44pct year on year, net profit margin 3.28%, year-on-year -0.18pct; for 2024Q2, the company's gross margin was 6.00%, -0.97pct year on year, net profit margin 3.08%, and -0.92pct year on year. We believe that the decline in gross margin or the development of large AI models is driving the continuous increase in the share of cloud computing business, leading to changes in the company's revenue structure. In the future, with mass production and shipment of the company's Blackwell series products and components such as liquid cooling, the company's gross margin is expected to rise steadily.

2024H1, net profit after deducting non-return to mother was 8.533 billion yuan, up 13.23% year on year; for 2024Q2, net profit after deducting non-return to mother was 4.261 billion yuan, down 1.58% year on year. We believe that mainly due to 2024H1, financial revenue decreased by about 0.648 billion yuan year on year, of which exchange profit and loss decreased by about 0.544 billion yuan. The company said that after deducting the full impact of exchange gains and losses on non-net profit, total profit for the second quarter increased 25% year-on-year.

AI servers increased year over year/month on month in the second quarter, with 400G/800G high-speed switches +70% cloud computing revenue: 2024H1, cloud computing revenue +60%, of which cloud service provider revenue accounted for 47%, up 5 pct from the same period last year; 2024Q2, cloud computing accounted for 55% of revenue, up more than 70% year on year, and more than 30% month-on-month. ① AI server: 2024H1, revenue increased 230% + year over year, accounting for 43% of server revenue. 2024Q2's revenue increased by more than 270% year on year and more than 60% month on month. The share of server revenue rose to 46%, accounting for a quarterly increase. The company said that the production capacity of next-generation AI servers for customers is sufficient, and downstream orders are highly visible. ② Universal server:

2024H1, revenue increased 16% year over year, and recovery was strong.

Communications and mobile network equipment: 2024H1 achieved high year-on-year unit growth. Q2 single-quarter year-on-year growth was as high as 20%. 2024Q2, 400G, 800G high-speed switch revenue increased 70% year over year.

The company's 800G high-speed switches have been shipped one after another. It is expected that the second half of 2024 will begin to increase and contribute significant revenue, promoting further optimization of the company's product structure.

Blackwell's short-term delay did not change demand growth, and continued to increase the capital expenditure of the North American CSP factory. Nvidia launched the B200A for the middle and low end AI markets.

We believe that although Nvidia's B-series products have been delayed, Blackwell GPUs are expected to expand in 2025 as issues such as technology and production capacity are solved. B200A GPU products will be launched to meet the needs of low-end and mid-tier AI systems, and demand for Hopper architecture products is still strong. At the same time, the capital expenditure of North American CSP manufacturers continues to grow, the capital expenditure guidelines of companies such as Microsoft, Meta, Amazon, and Google have improved, and the AI computing power sector is still booming.

The company is increasing investment in AI technology research and development. With 2024H1, the company's R&D investment reached 4.876 billion yuan, and adjusted and increased 0.1 billion yuan to the R&D expenses of the Next Generation Communications Product R&D Center Project (Shenzhen Fugui), thereby expanding its R&D investment in products related to AI infrastructure. Furthermore, the company is further expanding the breadth of “big data+robotics” scenarios through industrial mergers and acquisitions in the fields of AI servers, semiconductors, robotics, new energy, medical devices, etc., to help it create a new competitive advantage in multiple scenarios and applications in the field of industrial AI.

Profit forecasts and investment ratings: The company is a leading global provider of cloud computing and communication network products and services, and will benefit from the growing demand for AI computing power worldwide. We expect the company's revenue in 2024-2026 to be 553.951/677.212/782.954 billion yuan, respectively, net profit to mother of 24.502/30.503/35.452 billion yuan, EPS 1.23/1.54/1.78 yuan/share, respectively. The PE corresponding to the current stock price is 17.34/13.93/11.98X, respectively, maintaining a “buy” rating.

Risk warning: Big model development falls short of expectations, macroeconomics affects downstream demand, market competition intensifies, new product development falls short of expectations, and intensification of the game between China and the US.