Key points of investment

The performance was in line with expectations, with a year-on-year increase of 5.8% compared to the previous year after deduction

In the first half of 2024, the company achieved operating income of 37.95 billion yuan, +5.3% year over year; net profit to mother was 1 billion yuan, a decrease of 2.1% year over year. We expect the reduction in other earnings to be mainly due to increased income tax expenses and other revenue reductions. Other revenue reductions were due to a decrease in government subsidies confirmed by the subsidiaries Xinhua 3 and Ziguang Computer Technology Co., Ltd. compared to the same period last year. The increase in income tax is due to a decrease in tax refunds paid by the subsidiary Xinhua 3.

24H1 achieved deduction of 0.89 billion yuan, or +5.8% year-on-year. The company's revenue and deduction achieved steady growth mainly due to the company actively grasping the market and industry opportunities brought by AIGC and continuously strengthening its focus and investment in network, computing, security, storage, cloud and intelligent businesses. At the same time, the company optimized the organizational structure, improved operational efficiency, and strengthened cost management. Expenses decreased 13.0% year-on-year during the first half of the year.

In a single quarter of 24Q2, the company achieved operating income of 20.94 billion yuan, +7.3% YoY, +23.2%; realized net profit of 0.59 billion yuan, +0.6% YoY, +41.8% month-on-month; realized deduction of 0.55 billion yuan without return to mother, +8.5% YoY and +60.5% month-on-month. 24Q2 sales gross margin was 18.28%, down 1.46 pct year on year and 1.69 pct month on month; net sales margin was 4.90%, down 0.37 pct year on year, up 0.79 pct month on month.

The three new Xinhua acquisitions are progressing in an orderly manner

The company announced on May 24, 2024 that it intends to acquire 30% of the shares in Xinhua 3. After the acquisition is completed, the proportion of shares held by listed companies indirectly in Xinhua 3 will increase from 51% to 81%. The company recently announced that it has successively obtained documents and/or approvals from government agencies including the National Development and Reform Commission and the State Administration of Foreign Exchange as a prerequisite for the settlement of this transaction, and the company is actively and orderly advancing the work related to the settlement of this transaction.

In the first half of 2024, Xinhua achieved operating income of 26.428 billion yuan, +5.75% year on year; achieved operating profit of 1.996 billion yuan, an increase of 12.91% year on year; and achieved net profit of 1.82 billion yuan. The revenue of the three domestic government enterprises of Xinhua reached 20.212 billion yuan, up 8.31% year on year; domestic operator business revenue was 5.019 billion yuan; international business revenue was 1.198 billion yuan, of which the H3C brand products and services independent channel business revenue was 0.416 billion yuan, an increase of 61.22% year on year.

Deeply involved in the AIGC open strategy and actively develop large models and computing power servers After the company proposed the “AIGC Open Strategy” in 2023, the company gave full play to the multiplication effect of computing power x connectivity and released a full-stack leading Lingxi intelligent computing solution. Using the “1+N” big model strategy of Baiye Lingxi private domain model+N selected large ecological models, the “1+N” big model strategy was deeply cultivated. Combining the scenario-based needs of various industries, the Baiye Lingxi model has formed various scenario applications such as “AI+ digital government”, “AI+ healthcare”, and “AI+ enterprise”, and has played an important role in the fields of government, enterprises, medical care, media, and transportation.

The company released the G7 series modular heterogeneous computing power server. Among them, the H3C UniServer R5500 G7 supports large-scale model training on a scale of 100 billion parameters, uses a modular design with system decoupling, and is compatible with the latest OCPOAI open hardware standards to achieve open and evolvable computing power; the H3C UniServer R5330 G7 is equipped with 2 latest processors+GPU heterogeneous computing power to support large-scale model hybrid parallel training. The self-developed next-generation modular edge server H3C UniServer E3300 G6 has the triple advantages of computing network integration, edge intelligence, and green efficiency.

The company released the Aofei Computing Power Platform 3.0, which can support unified scheduling of 10,000 card clusters and heterogeneous computing power of multiple CPUs and GPUs, and provides full life cycle management of large models centered on AI data assets.

Continuing to promote overseas business development, it is expected to create a “second curve” of revenue growth. In the first half of 2024, the company's foreign business achieved revenue of 1.46 billion yuan, or +26.1% over the same period, which is progressing smoothly. Xinhua 3 continues to cultivate overseas markets and strengthen its global layout. In 2023, Xinhua 3 released a new overseas strategy to help overseas countries and regions achieve “localization” in the three aspects of ecosystem, talent empowerment and technological innovation, and successively launched a series of scenario-based solutions and new products such as “collaborative office”, “innovative education”, “intelligent manufacturing”, “efficient medical care”, and “reliable public services” to help customers from many countries build future-oriented digital infrastructure. Xinhua 3 has achieved project breakthroughs and successfully implemented and delivered in more than 70 countries, including Malaysia, Indonesia, Thailand, Pakistan, Kazakhstan, Turkey, Japan, Spain, Singapore, South Africa, and Mexico, and has successfully expanded into new markets such as the United Arab Emirates, Vietnam, and Mongolia. In the future, the company is expected to turn the overseas market into the “second curve” of the company's revenue growth.

Strengthen cost management and improve operational efficiency

The company continued to optimize the organizational structure, improve operational efficiency, and strengthen cost management. Expenses decreased by 13.0% year-on-year during the first half of '24. 24H1's sales, management, and R&D expenses rates were 5.5%, 1.2%, and 6.4%, respectively. The year-on-year decrease was 1.1 pct, 0.1 pct, and 1.3 pct, respectively. The cost rate control effect was obvious.

Profit forecasting and valuation

The company's net profit for 24-26 is estimated to be 2.4 billion, 2.8 billion, and 3.4 billion, respectively. The corresponding PE multiples for 24-26 are 24, 20, and 16 times, respectively, maintaining a “buy” rating.

Risk warning

The progress of the acquisition of 30% of the shares in Xinhua 3 fell short of expectations, overseas business growth fell short of expectations, progress in computing power products fell short of expectations, overseas policies fell short of expectations, etc.