Incidents:

On August 30, 2024, the company released its 2024 mid-year report: 2024H1. The company's revenue was about 6.076 billion yuan, up 21.23% year on year, net profit to mother was -0.422 billion yuan, an increase of 33.37% year on year; net profit not attributable to mother was 0.424 billion yuan, an improvement of 41.20% year on year. 2024Q2 achieved revenue of 3.413 billion yuan, up 21.30% year on year; net profit to mother -0.172 billion yuan, an increase of 47.56% year on year; net profit after deducting non-return to mother -0.157 billion yuan, an increase of 55.02% year on year.

Investment highlights:

Net profit due to 2024H1 improved year-on-year, and the effect of reducing costs and increasing efficiency was good

According to the company's semi-annual report, due to factors such as increased competition in some business markets and industry-related policy adjustments, the company's overall gross margin declined; at the same time, due to losses in the operating efficiency of joint ventures, the company lost investment income. The company continues to focus on its main business, continue to push forward reform initiatives, focus on strengthening management, maintain the intensity of investment in scientific and technological innovation, achieve steady growth in operating income, net profit attributable to shareholders of listed companies has improved year-on-year, and the quality of development has further improved.

2024H1, the company's gross sales margin was 17.18%, a year-on-year decrease of 4.66ct; the net sales margin was -6.44%, reducing losses year-on-year. In the first half of the year, the company's sales expense ratio, management expense ratio, and R&D expense ratio were 3.60%, 7.00%, and 9.05%, respectively, compared with -2.23pct, -1.49pct, and -4.67pct, respectively. Expenses dropped significantly, or mainly the company focused on the main business to reduce costs and increase efficiency.

The computing industry's revenue growth rate was high in the first half of the year, and orders for system equipment emerging businesses increased year-on-year

Computing industry: 2024H1, business revenue of 4.696 billion yuan, up 37.04% year on year, gross margin was 14.41%, down 3.04 pct year on year. Mainly, the computing industry market is gradually being implemented at an accelerated pace, market demand continues to be released. The company promptly grasped market segmentation opportunities and strengthened bid management, and orders increased dramatically year-on-year; achieved new breakthroughs in business segments and achieved breakthrough results in the fields of finance, insurance, transportation, etc.; seizing server market growth opportunities, AI server power supplies occupy a leading position in China; and consumer terminals are actively expanding major customers and establishing cooperation with many well-known foreign brands.

System equipment: 2024H1, business revenue of 0.985 billion yuan, a year-on-year decrease of 18.02%, gross margin of 22.33%, a year-on-year decrease of 7.67 pcts. Traditional business orders declined due to continuing factors such as price reviews and changes in tax exemption policies; orders for emerging businesses such as marine informatization and special computing increased sharply year-on-year, which is expected to bring in additional revenue.

Feiteng builds a CPU+XPU combo punch, or benefit from the further development of the Xinchuang industry

Feiteng: 2024H1 achieved revenue of 0.608 billion yuan, a year-on-year increase of about 23%, and net profit of -0.296 billion yuan. In 2014-2024, Feiteng developed more than 10 high-performance CPUs, with cumulative applications exceeding 8.5 million chips. Since the launch of new products such as the next-generation server CPU Feitengyun S5000C and the next-generation desktop CPU Feiteng Tengrui D3000, they have been applied in many key industries. Furthermore, Feiteng is speeding up the development of intelligent computing processors to create a “CPU+XPU” combo.

As of August 2024, the number of Feiteng ecosystem partners has exceeded 6,500, supporting the launch of more than 4,900 Feiteng platform devices, and more than 66,000 software that have been and are being adapted.

The development of the Xinchuang industry has entered a deep-water zone. According to IDC, China's general server market is expected to show a growing trend in 2024. By the end of 2023, the chip localization rate in China's server market is less than 20%, and there is still plenty of room for development. On May 20, three CPU products, including Feiteng Tengyun S5000C, Tenglong E2000, and Tengrui D3000, were selected for the second phase of the Xinchuang National Test “Safety and Reliability Evaluation Results Announcement (No. 1, 2024)”. On July 16, the “2024 Joint Solicitation and Procurement Project of Central State Authorities Framework Agreement for Desktop Computers” was officially launched.

Profit forecast and investment rating: The company is the main force in the computing industry under China Electronics and will benefit from the high-quality development of the autonomous intelligent computing industry for a long time. We expect the company's revenue for 2024-2026 to be 15.549/18.788/21.654 billion yuan, respectively, net profit to mother of 0.102/0.329/0.55 billion yuan, EPS 0.03/0.10/0.17 yuan/share, respectively. The PS corresponding to the current stock price is 1.67/1.38/1.20 X, respectively, maintaining a “buy” rating.

Risk warning: Macroeconomics affects downstream demand, Xinchuang's progress falls short of expectations, technological iteration and upgrading falls short of expectations, market competition intensifies, and the game between China and the US intensifies.