Incident: On August 24, the company released the “2024 Semi-Annual Report”, achieving operating income of 42.064 billion yuan, an increase of 68.71% year on year; net profit attributable to shareholders of listed companies was 0.597 billion yuan, an increase of 90.56% year on year, in line with market expectations.
24H1's performance is in line with expectations, and server industry demand may have improved significantly. 1) In the first half of 2024, the company achieved operating income of 42.064 billion yuan, an increase of 68.71% year on year; net profit to mother was 0.597 billion yuan, an increase of 90.56% year on year.
Among them, looking at Q2 alone, revenue for the second quarter was 24.457 billion yuan, up 58.84% year on year; net profit to mother was 0.291 billion yuan, a sharp increase of 152.61% year on year, significantly recovering from the low base of the previous year. 2) In the first half of 2024, market demand in the server industry gradually improved. The company seized upward opportunities in the industry, improved product line layout, continued to work on product technology innovation and customer satisfaction, vigorously expand domestic and foreign customers, and achieve rapid business growth.
Gross margin fluctuates in the short term, and impairment losses partially affect apparent profit margins. 1) In terms of gross margin by industry, the gross margin of the electronics industry during the reporting period was 7.64%, the gross margin of servers and components was 7.65%, and the gross margin of IT terminals and parts was 5.98%. Compared with the same period of the previous year, the gross margin was -3.54pct, -3.60pct, +3.16pct, or lower due to large purchases from Internet customers. 2) During the reporting period, the company's sales expenses ratio was 1.65%, the management expense ratio was 0.73%, and the R&D expenses ratio was 3.26%, down 1.08pct, 0.84pct, and 2.48pct respectively from the same period last year. Overall, the company is relatively stable in terms of cost control. 3) During the reporting period, the company's net profit margin was 1.42%, which appears to be temporarily under pressure. During this period, total asset impairment losses amounted to -$0.302 billion, mainly due to the financial treatment of inventory and contract performance costs; total credit impairment losses were -0.226 billion yuan, which mainly depended on the financial processing of bills receivable and accounts, which had a significant impact on apparent profits, or were related to the company's procurement, delivery and receipt pace.
The AIGC wave has arrived, and the company is expected to gradually benefit as a server leader. 1) In 2023, the AIGC (Generative Artificial Intelligence) development boom triggered by ChatGPT made global enterprises generally pay attention to and explore the layout of AIGC, and accelerate intelligent development in various industries and fields. According to the “2023-2024 China Artificial Intelligence Computing Power Development Assessment Report”, artificial intelligence is accelerating progress from perceptual intelligence to generative intelligence, and the scale of China's artificial intelligence computing power market is rapidly growing and expanding. In 2023, China's artificial intelligence server market will reach 65 billion yuan, an increase of 82.5% over the previous year; the scale of intelligent computing power is expected to reach 414.1 EFLOPS (10 billion floating point operations per second), an increase of 59.3% over the previous year. 2) The company continues to focus on smart computing represented by cloud computing, big data, and artificial intelligence, and continues to innovate in R&D, production, delivery, and service models. According to data released by Gartner and IDC, in 2023, the company's server market share is second in the world and number one in China; the storage market share is the top three in the world and number one in China; and the market share of liquid cooled servers and edge servers is number one in China. 3) We believe that Scaling-law will bring about a continuous increase in the amount of large model parameters and training data; at the same time, the emergence of popular applications will drive inference demand to achieve a leap forward. As a core leader in domestic computing power infrastructure, the company will actively respond to challenges and is expected to gradually benefit.
Maintain a “buy” rating. Considering the external environment, we believe that demand for the Internet will gradually recover. At the same time, AI servers will benefit from innovation and application of large models, etc., and demand for new infrastructure is expected to be significantly released, thus driving the company's performance improvement. In 2024-2026, we expect the company's revenue to be 82.203, 96.91, and 111.373 billion yuan, respectively, and net profit to mother of 2.049, 2.618, and 3.125 billion yuan respectively, maintaining a “buy” rating.
Risk warning: AI industry development falls short of expectations, corporate business progress falls short of expectations, increased industry competition, macroeconomic risks, changes in the international environment.