1H24 Company performance is under pressure, demand for intelligent computing is expected to drive recovery

According to the company's interim report, the company's 1H24 revenue/net profit attributable to mother was 7.299/0.125/0.106 billion yuan, respectively, with year-on-year changes of +5%/-37%/-23%, respectively; in the 2Q24 single quarter, the company's revenue/net profit to mother/ net profit after deduction of non-attributable net profit was 4.16/0.114/0.106 billion yuan, respectively, with year-on-year changes of 15%/-3%/+62%, respectively. We are optimistic that domestic intelligent computing demand will drive the growth of the network equipment market. The company's performance is expected to gradually recover. The growth rate of the network equipment business will be reduced due to short-term downstream demand, and the gross profit margin of terminals and other businesses will be lowered due to industry competition. The net profit for 24-26 is 0.538/0.684/0.859 billion yuan. Comparatively, the company's 24-year consistent PE forecast is 19.68x, giving the company a 24-year 20x PE, corresponding to a target price of 18.15 yuan, maintaining the “gain” rating.

The network equipment business maintained its leading position in the market. With outstanding overseas results, 1H24 achieved revenue of 4.56 billion yuan of enterprise network equipment, an increase of 1.68% over the previous year; communication products achieved revenue of 1.168 billion yuan, an increase of 0.51% year on year; and network terminals achieved revenue of 0.416 billion yuan, an increase of 14.14% year on year. In the first half of the year, the company maintained its leading position in the network equipment business and launched new products with market influence in emerging fields such as data center switches, optical communications, and Xinchuang terminals. By region, 1H24's international market revenue was 1.348 billion yuan, an increase of 43.68% over the previous year. The company accelerated the expansion of various business units by strengthening overseas channel construction and developing technical cooperation with foreign manufacturers. Looking at branches, the subsidiary Ruijie Network achieved revenue of 5.043 billion yuan, an increase of 4% over the previous year; the subsidiary Shengteng Information achieved revenue of 0.55 billion yuan.

Under the influence of industry competition, profitability was under pressure in the short term. The comprehensive gross margin of 1H24, a company adhering to an innovation-driven strategy, was 32.76%, down 2.38pct from the previous year. Among them, the gross margin of enterprise-grade network equipment/ communication products/ network terminal products decreased by 2.76pct/0.29pct/7.56pct to 39.50%/16.80%/17.66%, mainly due to increased industry competition. Expense control is excellent. 1H24's sales expense rate/management expense rate/R&D expense ratio were 13.31%/5.18%/14.15%, respectively, with year-on-year changes of +0.15pct/+0.45pct/-2.47pct. The company adheres to an innovation-driven development strategy and promotes continuous improvement of product performance through strong R&D investment. 1H24 has applied for a total of 147 patents. Furthermore, it continues to innovate in scenarios such as smart networks and smart clouds, and has been highly recognized by users. In the future, the company said it will actively lay out strategic industries such as optical communications and metaverse.

We are optimistic that domestic intelligent computing demand will drive the company's performance recovery. We are optimistic that under the growth of domestic intelligent computing demand, the company is expected to usher in recovery opportunities with the full-stack layout of ICT equipment and innovative experience in various smart scenario solutions. Considering the pressure on some downstream demand and the slowdown in customer investment, we lowered our 24-26 net profit forecast to 0.538/0.684/0.859 billion yuan (previous value: 0.633/0.871/1.057 billion yuan), which is comparable to the company's consistent expected PE of 19.68x in 24 years, giving the company 20x PE for 24 years, corresponding to a target price of 18.15 yuan, maintaining a “gain” rating.

Risk warning: Data center demand is lower than expected; Xinchuang demand is lower than expected; chip supply is insufficient.