Incidents:

The company released its 2024 semi-annual report. In the first half of the year, it achieved revenue of 37.951 billion yuan, a year-on-year increase of 5.29%, achieved net profit to mother of 1 billion yuan, a year-on-year decrease of 2.13%, and achieved deduction of 0.894 billion yuan in non-net profit, an increase of 5.78% over the previous year.

Revenue grew steadily, and Q2 profit remained flat year over month: the company achieved revenue of 20.945 billion yuan in Q2, up 7.32% year over year, up 23.16% month on month compared to the first quarter, and accelerated year on year. Single Q2 achieved net profit of 0.587 billion yuan, up 0.60% year on year and 41.82% month on month. Non-net profit of 0.551 billion yuan was deducted, up 8.46% year on year and 60.54% higher month on month.

Xinhua 3 maintained steady growth: 24H1 Xinhua 3 achieved operating income of 26.428 billion yuan, yoy +5.75%, achieved operating profit of 1.996 billion yuan, yoy +12.91%, and achieved net profit of 1.82 billion yuan to mother, which was basically the same. China's internal affairs enterprise revenue reached 20.212 billion yuan, up 8.31% year on year; domestic operator business revenue was 5.019 billion yuan, down 4.14% year on year; international business revenue was 1.198 billion yuan, up 9.5% year on year.

By product, the ICT business is resilient. Among them, ICT infrastructure and services were 26.154 billion yuan, +5.43% year over year; IT product distribution and supply chain services were 13.616 billion yuan, +6.26% year over year. Among the three businesses of Xinhua, the server business is expected to be driven by increased demand for AI-related server localization. Looking ahead, we expect the company's AI server business to improve next year as demand for domestic AI servers continues to rise. In terms of the switch business, the company's Ethernet switches continue to lead the domestic market share, and the DC switch share ranks second with 29%. The company continues to deploy to high-speed high-end switches and pioneered the release of the 51.2T 800G CPO silicon optical data center switch. The related 400G/800G switch orders and revenue are expected to drive rapid growth as demand for high-speed switches in the industry increases.

In terms of profitability, in terms of gross margin, 24H1 achieved a gross margin level of 19.03% (yoy-1.29pct). By product, the gross profit margin for ICT infrastructure and services is 24.37% (yoy-1.06pct); the gross profit margin for IT product distribution and supply chain services is 5.82% (yoy-1.64pct). In terms of net interest rate, the company achieved a net interest rate level of 4.55% (yoy-0.45pct) in the first half of the year. Among them, Q2 achieved a net interest rate of 4.90% in a single quarter, an improvement over the previous quarter.

Looking forward to the future, 1) the company's operator business share is expected to continue to increase; 2) traditional digital communication products are expected to usher in a steady recovery; 3) AI computing/network products are expected to usher in rapid growth; 4) overseas expansion continues. At the same time, the company's acquisition of the remaining 30% of Xinhuasan's shares has obtained documents and/or approval from the Chinese government agencies that are prerequisites for this transaction. The company is actively and orderly advancing the work related to transaction settlement, and future development is worth looking forward to.

Profit forecast and investment advice: Taking into account the business situation and changes in profit levels in the first half of the year, we adjusted the 24-26 profit forecast to 2.42/2.88/3.43 billion yuan (previous value was 2.531/3.149/3.73 billion yuan), and the corresponding valuation was 22/19/16 times, maintaining the “gain” rating.

Risk warning: risks such as the AI industry falling short of expectations, fierce competition affecting gross margin levels, slow recovery in traditional businesses, and falling short of product market share expansion as expected