Incident description:

China Unicom released its 2024 semi-annual report. With 2024H1, the company achieved revenue of 197.3 billion yuan, +2.9% YoY; of these, service revenue was 175.7 billion yuan, +2.7% YoY. Total profit realized was 16.8 billion yuan, +10.2% year over year; net profit to mother was 6 billion yuan, +10.9% compared to the same period. Incident review:

The quality of networked communication services has been stabilized and improved, and the scale and value of networked users have achieved a “double increase”. With 2024H1, the company's networked communication services (including mobile networking, broadband networking, television networking, dedicated line networking, communication services and information services) achieved revenue of 125.1 billion yuan, +2.1% over the same period last year. Among them, the number of mobile users reached 0.339 billion, with a net increase of 6.09 million users. The net increase reached a record high in the same period in the past five years; the 5G package penetration rate exceeded 80%, an increase of 10.5pp over the previous year. The number of broadband service users reached 0.117 billion, a net increase of 3.52 million; the number of integrated users exceeded 80 million, and the integrated package ARPU reached 103 yuan. Among them, gigabit broadband, FTTR, Unicom Cloud Drive, and video ringtones made positive contributions to driving integrated ARPU. In the future, the company will insist on expanding new scenarios and new values through new integration, and adhering to business integration and product integration (creating several billion-dollar products, such as Unicom Cloud Drive and video ringtones; leading the entire home for home customers, expanding smart homes, smart security, and ultra-clear content) and terminal integration.

The digital intelligence business expands and increases efficiency, and actively explores a new blue ocean of computing network digital intelligence. The company's digital computing business includes six major segments: Unicom Cloud, Data Center, Mathematical Integration, Data Services, Digital Intelligence Applications, and Internet Communications Security. 2024H1 achieved revenue of 43.5 billion yuan, +6.6% over the same period last year. Among them, Unicom Cloud revenue was 31.7 billion yuan, +24.3%; data center revenue was 13.1 billion yuan, +5.0% year over year; data service revenue was 3.2 billion yuan, +8.6% year over year; digital intelligence application revenue was 3.7 billion yuan, +13.5% year over year; and Internet Communications security revenue was 1.4 billion yuan, +58.2% year over year. The company continues to invest in targeted computing power in the first segment of the computing power business. The entire network intelligent computing reached 10 EFLOPS in the first half of the year, and 2503 AI servers will be collected in 2024, and more than 20 large-scale computing power center parks will be laid out one after another. Second, it continues to enrich the intelligent computing product system. The company has officially launched the Yuanjing 2.0 platform, with model parameters reaching 204 billion and 35+ large-scale industry models. In the future, it will further cultivate appropriate scenarios, create unique capabilities, promote high-quality development of artificial intelligence, and add new momentum for medium- to long-term development to the digital intelligence business of the computing network.

Capital expenditure has been declining steadily, and the construction of a boutique network base continues to be strengthened. For 2024H1, the company's capital expenditure investment was 23.9 billion yuan, -13.4% year-on-year. The company focuses on the three “Internet, computing power networks, and data networks”, with mobile Internet 5G medium frequency base stations exceeding 1.31 million and low frequency base stations reaching 0.78 million. In the future, it will continue to push more than 100 cities to achieve commercial deployment of REDCAP and 5G-A; the computing power network will continue to build a “new eight vertical and eight horizontal” national backbone network, focusing on building a DCI high-energy computing power intelligent network; the data network takes advantage of ubiquitous access to build a 10M to 400G elastic bandwidth carrier network, and continues Strengthen the advantages of Unicom's blockchain. As reflected in cost control, the company's network operation and support costs have remained stable, and depreciation and amortization have declined slightly compared to the first half of last year. We believe that the company's gross margin level will improve steadily throughout the year.

Future outlook: Continued double-digit growth in profit and reduction in total capital expenditure. Regarding the 2024 business performance outlook, the company strives to achieve steady revenue growth and double-digit profit growth before tax. Annual capital expenditure will be controlled at around 65 billion yuan, -12% year over year. In terms of dividends, 2024H1, the company's dividend was 0.2481 yuan per share, +22.2% year-on-year, and the dividend payout ratio reached 55%. It is expected to continue to strengthen shareholder returns in the future.

Profit forecast, valuation analysis and investment suggestions: The company's 2023-2025 net profit is expected to be 9.281/10.348/11.441 billion yuan, up 13.6%/11.5%/10.6% year on year; the corresponding EPS is 0.29/0.33/0.36 yuan, and the PE corresponding closing price on August 16, 2024 is 16.2/14.5/13.1 times; the company's performance growth is expected to remain at a high level in the industry, and the ROE and dividend ratio are expected to continue to increase and maintain “Buy-A” rating.

Risk warning:

There is a risk that ARPU values for mobile and broadband services will decline. The company's 5G package penetration rate has exceeded 78%. As high-value 5G users complete penetration, the growth rate of mobile ARPU value will slow down in the future. If 5G traffic growth falls short of expectations or the development of integrated information services falls short of expectations, there is a risk that ARPU will decline.

There is a risk that the growth rate of emerging digital intelligence businesses such as Unicom Cloud will decline. The digital intelligence business contributed more than 50% to the new revenue in 2023. Unicom's cloud revenue growth rate in 2023 was 42% lower than the previous year. If competition in the cloud computing market is intense and the data service business falls short of expectations, there is a risk that the growth rate of emerging businesses will decline.