1. Incidents

The company released its 2024 semi-annual report. During the reporting period, it achieved revenue of 37.95 billion yuan, a year-on-year increase of 5.3%, and achieved net profit to mother of 1 billion yuan, a year-on-year decrease of 2.1%; after deducting non-net profit of 0.89 billion yuan, the growth rate recovered, with a year-on-year increase of 5.8%.

Looking at a single quarter, 2024Q2 achieved revenue of 20.94 billion yuan, up 7.3% year on year; realized net profit of 0.59 billion yuan, up 0.6% year on year; realized deducted non-net profit of 0.55 billion yuan, an increase of 8.5% year on year.

2. Government enterprises and international business continued to grow. Carrier business fell 4.1% year on year. By product, 2024H1 ICT infrastructure and services were 26.15 billion yuan, up 5.4% year on year; IT product distribution and supply chain services were 13.62 billion yuan, +6.3% year over year.

Among them, 2024H1 achieved revenue of 26.43 billion yuan, a year-on-year increase of 5.8%, and achieved net profit of 1.82 billion yuan to mother, which was basically the same. China's internal affairs enterprise revenue reached 20.21 billion yuan, up 8.3% year on year: domestic operator business revenue was 5.02 billion yuan, down 4.1% year on year; international business revenue was 1.2 billion yuan, up 9.5% year on year. Among them, revenue from the independent channel business of H3C brand products and services was 0.416 billion yuan, up 61.22% year on year.

3. Gross margin declined, and the cost ratio was reduced, and overall net profit narrowed slightly by 2024H1 gross profit margin of 19.0%, a year-on-year decrease of 1.3 pct; by product, the gross profit margin for ICT infrastructure and services was 24.4%, a year-on-year decrease of -1.1 pct; the gross profit margin for IT product distribution and supply chain services was 5.8%, a decrease of 1.6 pct year on year. By region, the domestic gross profit margin was 18.5%, a year-on-year decrease of 1.2 pct, and the overseas gross profit margin was 35.6%, a year-on-year decrease of 1.5%.

In terms of net interest rate, the 2024H1 net interest rate was 4.5%, a year-on-year decrease of 0.5 pct. The net interest rate for the Q2 single quarter was 4.9%, an improvement over the previous quarter.

Among them, the cost ratio for the period was 13.6%, down 2.9 pct year on year, and the sales/management/finance/R&D expenses ratio was 5.5%/1.2%/0.6%/6.4%, respectively, down 1.1/0.1/0.3/1.3 pct year on year.

4. The acquisition of shares in Xinhua is progressing in an orderly manner, and profits are expected to increase

According to the company's August 26 “Notice on the Progress of Major Asset Purchases”, Ziguang International, a wholly-owned subsidiary of the company, plans to purchase 30% of Xinhuasan's shares for a total of about 2.14 billion US dollars. After the transaction is completed, the company's shareholding ratio in Xinhua 3 through Ziguang International will increase from 51% to 81%. According to the announcement, on July 18, 2024, Ziguang International and banks such as Societe Generale, CITIC, Minsheng, and Huaxia jointly signed a merger and acquisition syndicated loan agreement. The total loan principal amount did not exceed RMB 9.5 billion.

As of the announcement date, the company has obtained documents and/or approvals from Chinese government agencies that are prerequisites for the settlement of this transaction, and the company is actively and orderly advancing the work related to the settlement of this transaction.

5. AI catalysis, the data center switch market space continues to expand. We expect that with the growth of AI computing power and the demand for localization, the company's server business and high switching business are expected to continue to benefit. Among them, demand for AI server localization is expected to drive related businesses to maintain a growth trend; in the field of high-speed switches, the company provides industry-leading 400G/800G high-speed switch products, and has advanced technology layouts such as CPO/LPO. It is the first 800G CPO silicon optical switch in the industry, suitable for business scenarios such as AIGC clusters or high-performance core switching in data centers. Under the continuous catalytic demand for AI intelligence, switch-related revenue is expected to grow rapidly.

5. Investment suggestions:

As a leader in the digital solutions industry, the company continues to benefit from the digital transformation needs of Baixing and the industry. Performance is expected to recover steadily. At the same time, with the continuous promotion of AI applications, the company is expected to benefit as a related infrastructure manufacturer. Maintaining revenue forecasts, it is estimated that 2024-2026 will achieve revenue of 83.1/90.15/98.7 billion yuan, respectively. Considering the large amount of this acquisition transaction, related bank loans led to an increase in financial expenses and debt size. At the same time, according to corporate accounting standards, listed companies must account for the option forward arrangement for the remaining 19% of Xinhuasan's shares agreed with HPE Cayman as financial liabilities, leading to an increase in the size of debt. After adjusting net profit to mother, net profit forecast to mother was adjusted from 2.68/3.86/4.53 billion yuan to 2.4/3.49/3.98 billion yuan. Earnings per share were adjusted from 0.94/1.35/1.58 yuan to 0.83/1.22/1.39 yuan, corresponding to the closing price PE of 19.06 yuan/share on August 28, 2024, which is 22.8/15.6/13.7 times, respectively, maintaining the “buy” rating.

6. Risk warning:

The digital transformation fell short of expectations; operators' investment in cloud computing fell short of expectations; the promotion of AI intelligent computing fell short of expectations; the risk of fluctuations in the cost of raw materials such as upstream chips; the risk of the transaction being suspended, suspended, or cancelled; and the remaining 19% equity uncertainty of Xinhua 3.