Incidents:

On August 23, the company released its 2024 semi-annual report:

With 2024H1, the company achieved revenue of 42.064 billion yuan, a year-on-year increase of 69.63%, net profit to mother of 0.597 billion yuan, a year-on-year increase of 83.53%, after deducting net profit of 0.422 billion yuan, compared to 0.011 billion yuan in the same period last year.

With 2024Q2, the company achieved revenue of 24.457 billion yuan, a year-on-year increase of 58.49%; net profit to mother was 0.291 billion yuan, an increase of 129.01% year-on-year, and net profit not returned to mother was 0.182 billion yuan, an increase of 213.48% year-on-year.

Investment highlights:

Overseas revenue increased 172% year on year in the first half of the year, and “AI+ GM” computing power is expected to continue to grow by 2024H1. The company's domestic business revenue was 29.8 billion yuan, an increase of 46.93% year on year. We believe that domestic business growth is mainly due to the joint growth of AI servers and general-purpose servers. We expect that in the second half of 2024, domestic AI computing power capital expenditure will increase further, and demand for domestic general-purpose servers will continue to rise after going through the inventory removal cycle in 2023.

2024H1, the company's overseas business revenue was 12.264 billion yuan, an increase of 171.54% year-on-year (up from 9.547 billion yuan in overseas revenue for the full year of 2023). The company has continuously accelerated its global layout, enhanced its overseas localization capabilities, established a large number of typical industry customers in countries and regions such as Europe, Japan, South Korea, and Southeast Asia, stabilized the market pattern and formed continuous large-scale output. The company has 8 global R&D centers, 14 global manufacturing centers and more than 50 business branches.

2024H1 net margin increased slightly year on year. New products+liquid cooling is expected to increase the profit level by 2024H1. The company's gross margin was 7.74%, down 3.7 pct year on year, and the net profit margin was 1.37%, up 0.11 pct year on year. We believe that the short-term pressure on the company's gross margin may be mainly due to the increase in the share of Internet customers with relatively low gross margins in 2024H1. Meanwhile, with 2024H1, the company calculated credit impairment losses of 0.226 billion yuan and asset impairment losses of 0.302 billion yuan, a cumulative increase of 0.242 billion yuan over 2023H1. If the impact of this partial impairment loss is restored, the company's performance growth rate may be even more impressive.

2024H1, the company's sales/management/ R&D/ finance cost rates were 1.65%/0.73%/3.26%/-0.12%, respectively, -1.08pct/-0.84pct/-2.48pct/+0.34pct.

The increase in the company's financial expenses is mainly due to an increase in interest expenses and an increase in exchange rate income due to exchange rate fluctuations.

The company continued to invest in R&D: released a new generation G7 computing power platform, and achieved the company's first liquid-cooled server in China in 2023. We believe that the company actively controls fees, consolidates server competition barriers, and develops core technologies such as liquid cooling to maintain a slight year-on-year increase in net interest rate in the first half of the year. It is also expected to continue to improve profitability in the future, which is expected to benefit from technological innovation and an increase in liquid cooling penetration.

Deploy “AI+” full-stack capabilities to welcome the AI computing power era

① Algorithms: The company opens up a diverse and multi-model collaborative path. With a platform-based and full-stack global optimization concept, the efficiency of large-scale model application development is improved through tool empowerment. In 2024, the company launched EPAI, an enterprise large-scale model development platform, which supports 20+ multiple computing chips, including CPUs, GPUs, and various types of acceleration cards. The company promoted the iteration of the “source” large model. In 2024, the “source 2.0-M32” open source large model was launched in cooperation with EPAI. The “source” large model algorithm has been filed and published.

② Computing power: Promote the integration of AI computing power into various computing platforms, and enhance diversified openness and green energy saving features. The company launched a new generation of open accelerated computing server NF5698G7 and other AI servers; the company released a next-generation modular liquid-cooled intelligent computing center, compatible with general-purpose CPUs, GPUs, and OAM, to achieve a PUE as low as 1.1. In 2024, the company and Intel released an AI general-purpose server. For the first time in the industry, it was possible to run a large model with 100 billion parameters based on a general-purpose processor.

③ Interconnection: Provides diverse network solutions such as Super AI Ethernet and IB networks for artificial intelligence scenarios. In 2024, the company launched the Super AI Ethernet Switch X400. It is the first in China based on the NVIDIA Spectrum-X platform. It has the advantages of high throughput, low latency, and high reliability. RoCE is optimized for AI large model scenarios. The performance of RoCE is 1.6 times higher than traditional RoCE network performance, providing leading AI network performance for large model training and inference.

Profit forecast and investment rating: The company is the world's leading provider of IT infrastructure products, solutions and services, and will benefit from the development of a global, digital and intelligent industry for a long time. We expect the company's revenue for 2024-2026 to be 95.771/120.549/149.973 billion, respectively, net profit to mother of 2.244/2.865/3.615 billion yuan, EPS 1.52/1.95/2.46 yuan/share, respectively. The PE corresponding to the current stock price is 21/16/13X, respectively, maintaining a “buy” rating.

Risk warning: The construction of an intelligent computing center falls short of expectations, the development of large models falls short of expectations, macroeconomics affects downstream demand, increased market competition, new product development falls short of expectations, etc.