Specific: The company released its 2024 semi-annual report. In the first half of 2024, it achieved revenue of 62.49 billion yuan, a year-on-year increase of 2.9%, and realized net profit of 5.73 billion yuan, an increase of 4.8% over the previous year, after deducting non-return net profit of 4.96 billion yuan, an increase of 1.1% year-on-year. Q2 achieved revenue of 31.91 billion yuan, a year-on-year increase of 1.1%, and net profit to mother of 2.99 billion yuan, an increase of 5.7% year-on-year.

Steady and upward management, focusing on “connection+computing power” industry opportunities. Affected by the global macroeconomy in the first half of the year, the company maintained a positive development trend and achieved steady growth. Looking at various businesses, the operator network reached 37.3 billion yuan in the first half of the year, a year-on-year decline of 8.6%, mainly affected by the overall domestic investment environment. Government and enterprise services reached 9.17 billion yuan in the first half of the year, an increase of 56.1% over the previous year. Mainly due to the increase in server and storage revenue, the company focused on “connection+computing power” to seize the incremental market of AI and Xinchuang, and achieved rapid growth in government and enterprise services. The consumer business achieved revenue of 10.62 billion yuan, an increase of 14.3% over the previous year, mainly due to the growth of household terminals and mobile phone products.

Expenses are properly controlled, and profit margins fluctuate due to product structure. The company achieved a gross profit margin of 40.5% in the first half of the year, a year-on-year decrease of 2.75pct. Among them, operators achieved a gross profit margin of 54.3%, a year-on-year increase of 0.12 pct, and government and enterprise businesses achieved a gross profit margin of 21.8%. The year-on-year decline was 5.74 pcts, and the consumer business achieved a gross profit margin of 18.93%, and a year-on-year increase of 1.11 pcts. The decline in gross margin in the first half of the year was mainly due to a decrease in the share of operators' business revenue, and the rapid growth of government and enterprise businesses with low gross margins. In terms of expenses, the company's R&D, sales, and management expenses all declined year-on-year in the first half of the year, reflecting the company's outstanding performance in cost control.

Launch a full-stack intelligent computing solution to enable the development of the industry in all aspects. The company actively grasped new opportunities in the AI industry and launched full-stack intelligent computing solutions. Servers and storage provided products suitable for mainstream GPUs in the industry. In terms of connectivity, the company launched a decoupled Nebula intelligent computing network solution to meet the construction of 100 cards to 10,000 cards, and launched a domestic ultra-high density 400/800G switch. Based on self-developed 7.2T distributed forwarding chip and 112Gb/s telling bus technology, it supports 576 400G or 288 800G interfaces. The 51.2T switch supports 128 400G interfaces and has been commercialized by Internet vendors. In terms of data centers, various new energy-saving products such as immersive liquid cooling have been launched, continuously increasing the deployment scale at key points, breaking through the Hong Kong market. The scale in the Philippines and Indonesia continues to increase, and the global market size has increased by more than 50% over the same period last year.

Investment advice: The company has obvious advantages in the field of computing power and connectivity. With the rapid growth of the company's government and business, the consumer business growth trend is maintained, and the operator business may also be expected to improve in the second half of the year. Combined with the company's excellent cost control, we expect the company to achieve continuous steady growth. We expect the company's net profit to be 10.33/11.34/12.37 billion yuan in 2024-2026, respectively, with corresponding valuations of 11.2/10.2/9.3 times, respectively. Maintain a “buy” rating.

Risk warning: operators' investment is less than expected, computing power demand falls short of expectations, macroeconomic risks.