1H24 net profit after deducting steady growth, focusing on the AIGC market and continuing to deepen the stack intelligence layout. According to the company's mid-year report, the company's 1H24 revenue/net profit to mother/net profit after deduction was 37.95/1/0.89 billion yuan, respectively, with year-on-year changes of +5%/-2%/+6%, respectively; 2Q24 single quarter revenue/net profit net profit after non-return to mother were 20.94/0.59/0.55 billion yuan, respectively, with year-on-year changes of +7%/+1%/+8%, respectively. The company deeply lays out the entire “cloud-network-computing-storage-AI” industry chain, which is expected to benefit from domestic intelligent computing construction. Based on short-term pressure from some businesses, we lowered the company's 24-26 net profit to 2.55/3.051/3.545 billion yuan (previous value: 26.45/32.10/36.29). Based on the SOTP method, the target market value is 77.3 billion yuan, and the target price is 27.03 yuan, corresponding to PE 30.31x in 24, maintaining the “gain” rating.

The ICT infrastructure business is developing steadily. In terms of overseas H3C brand revenue growth, in terms of ICT infrastructure, 1H24 Xinhua 3 achieved revenue of 26.43 billion yuan, up 5.75% year on year, and achieved net profit of 1.82 billion yuan, the same year on year. Among them, domestic government and enterprise business revenue increased 8.31% year on year to 20.21 billion yuan; domestic operator business revenue fell 4.14% year on year to 5.02 billion yuan, which means operator capital expenditure has been tightened; international The business grew 9.51% year over year to 1.198 billion yuan, including H3C brand and independent channel revenue of 0.416 billion yuan (+61.22% year over year). In terms of cloud computing/software integration/IT distribution business, 1H24 Ziguangyun/Ziguang Software/Ziguang Digital achieved revenue of 0.57/1.32/10.54 billion yuan respectively, with year-on-year changes of -5%/-17%/+4%, respectively.

Profitability fluctuated slightly, and the consolidated gross margin of 1H24, a company with a stable position in the ICT equipment market, was 19.03%, down 1.29pct from the previous year. Low-profit IT equipment products grew faster and accounted for an increase. Among them, the gross margin of the ICT infrastructure and service business was 24.37%, down 1.06 pcts year on year. In terms of cost ratio, the company's 1H24 sales expense rate/management expense rate/R&D expense ratio were 5.45%/1.22%/6.35% respectively, down 1.09/0.11/1.34pct from the previous year, and overall cost control was good. According to IDC data, the company's 1Q24 market share for Ethernet switches, campus switches, data center switches, enterprise WLANs, and X86 servers in China was 34.8%/41.6%/29.0%/30.3%/15.6% respectively, ranking first, first, second, and second respectively.

The merger and acquisition of the remaining shares of Xinhua 3 is progressing again, maintaining that the “increase in holdings” rating company issued a notice on the progress of the Xinhua 3 equity merger and acquisition during the same period. As of the disclosure date of the announcement, the company had obtained government documents as a prerequisite for delivery and signed a loan contract of no more than 9.5 billion yuan with the syndicate. We are optimistic about the company's growth potential as an ICT leader. We expect the 24-26 net profit to be 2.55/3.051/3.545 billion yuan, respectively. We expect its network equipment/server and storage/software and system integration/cloud computing/IT distribution sectors to contribute 12.83/6.61/0.107/0.228/0.27 billion yuan respectively for 24-year PE 37/25/21/33/13 Double, corresponding to the company's target market value of 77.296 billion yuan and target price of 27.03 yuan, maintaining the “gain” rating.

Risk warning: 1) The company's self-developed chip progress falls short of expectations or has invested too much; 2) the development of innovative business falls short of expectations; 3) the new business market falls short of expectations.