Description of the event

Communication Holdings recently released its 2024 semi-annual report. 2024H1 achieved revenue of 34.558 billion yuan, up 38.07% year on year; realized net profit of 2.852 billion yuan, up 35.70% year on year; realized deducted non-net profit of 2.428 billion yuan, up 36.82% year on year; achieved gross profit margin of 21.53%, a decrease of 2.01 pct year on year; achieved net profit margin of 8.25%, a decrease of 0.14 pct year on year; achieved net profit margin of 7.03%, a decrease of 0.06 pct year on year.

Incident comments

The operation is steady, and new markets continue to expand. In the first half of 2024, the company's gross margin was about 21.53% after being adjusted through the new accounting standards. The company's semi-annual report implemented the new accounting standards. The gross margin for the second quarter before the adjustment was about 22.48%, up about 22.15% from the first quarter, but it decreased from 25.23% in the same period last year, and the increase in the price of upstream raw materials affected the company's profitability to a certain extent.

According to IDC data, 2024H1's smartphone sales volume was about 54 million units, up about 33% year on year; the global smart phone market share was about 9.1%, up 1.5 pct year on year. In terms of regional distribution, in the first half of 2024, the company's share of the smart phone market in Africa exceeded 40%, ranking first; its share of the smart phone market in India was about 6.6%; the smartphone market share in Latin America was about 9.4%; and the smart phone market share in Central and Eastern Europe was about 11.2%. The company has a stable market position in the African region, and at the same time vigorously lays out emerging markets outside of Africa, and there is still considerable room for growth in the smartphone business.

Keep up with market trends and create a diversified product matrix. At the smartphone product level, with increasing attention to folding screen phones, in August 2024, TECNO, the company's innovative technology brand, released the PHANTOM Ultimate 2, an ultra-light and thin three-fold concept model, the new pioneer in the PHANTOM Ultimate concept model series. Previously, the company released the PHANTOM Ultimate, a scroll-screen concept phone. In terms of AI, the company actively explores large models and interconnection technology, and has built an architecture that enables multi-terminal integration and interoperability, AIOS system-level application reconstruction, AI end-side applications, and AI cloud-based collaborative applications. The company released TECNO AI, bringing a new generation of smart assistant Ella and innovative interactive experience, focusing on key user scenarios, using AI to enhance scenarios such as imaging, communication, office efficiency and creativity, developing a series of AI assistive function applications and continuing to iteratively promote the full AI transformation of the system to enhance users' mobile experience with smart devices.

The growth logic is clear, and I am optimistic about the company's competitiveness and long-term growth space. The company has built solid operating barriers in emerging markets, and the competitive pattern is clear. Smartphone sales still have plenty of room for growth. As the market recovers, the company is also expected to surpass the industry's growth rate. In the long run, Voice is the leading hardware and internet leader, and it is expected to develop a deeper level of diversified monetization of content terminals on the basis of OS monetization. And the company's co-creation and share+Glocal soft power will help the company maintain high long-term growth. Net profit due to mother is expected to be 5.73 billion yuan, 7.19 billion yuan, and 8.48 billion yuan in 2024-2026. The PE corresponding to the current stock price is 17x, 13x, and 11x, respectively, maintaining a “buy” rating.

Risk warning

1. Consumer electronics demand is uncertain;

2. There is uncertainty about the pace of new market expansion.