Incidents:

Q1-Q3 2024 achieved operating income of 290.12 billion yuan, a year-on-year increase of 3.0%, net profit to mother of 8.34 billion yuan, an increase of 10.0% year-on-year, and net profit of 6.88 billion yuan after deducting non-return net profit of 6.88 billion yuan, an increase of 1.0% year-on-year.

In Q3 2024, we achieved operating income of 92.78 billion yuan, a year-on-year increase of 3.3%, net profit to mother of 2.3 billion yuan, an increase of 7.8% year-on-year, and net profit of 1.82 billion yuan after deducting non-return net profit of 1.82 billion yuan, a decrease of 6.0% year-on-year.

1. The network communication service is steady, and the computing power business is developing rapidly

The network communication service is steady, and the net increase in mobile users reached a record high in the same period of the past 6 years. Mobile users reached 0.345 billion in the first three quarters, with a cumulative net increase of 11.23 million; of these, the 5G package was 0.286 billion users, the 5G package penetration rate was 83%, and the user structure continued to be optimized. The number of IoT connections was 0.594 billion, a net increase of nearly 100 million; fixed broadband users reached 0.121 billion, with a cumulative net increase of 7.12 million for the whole year.

The computing network digital intelligence business is actively expanding, and the computing power business is developing rapidly. Unicom Cloud achieved revenue of 43.86 billion yuan, an increase of 19.5% year on year; data center revenue of 19.69 billion yuan, up 6.8% year on year; the cumulative number of virtual private network service customers in the 5G industry reached 14,013; and Internet Communications security revenue maintained a strong growth trend.

The industrial Internet business achieved revenue of 60.69 billion yuan, accounting for 24.0% of main revenue, an increase of 1.8 pct over the previous year.

During the reporting period, 5G intermediate frequency base stations reached 1.36 million stations, 4G medium frequency shared base stations exceeded 2 million stations; 10G PON ports accounted for 80%, leading the industry; in response to massive data transmission needs, China Unicom's intelligent computing power network AInet was built, and 10,000 intelligent computing centers such as Lingang and Hohhot were built in Shanghai. The large-scale computing power center park fully covered the “East Digital West Computing” hub nodes.

2. Strengthen management, improve quality and efficiency, increase R&D investment, and steadily release profit margins for the first three quarters with a gross profit margin of 26.0%, a slight increase of 0.8 pct over the previous year, a net interest rate of 6.5%, and a slight increase of 0.4 pct over the previous year. Benefiting from reduced depreciation and amortization, the overall profit margin continued to be released.

The cost rate for the first three quarters was 16.6%, a year-on-year decrease of 0.5 pct. The sales/finance expense ratio was 9.2%/-0.1%, respectively, the management expense ratio was 5.6%, a year-on-year decrease of 0.9 pct, and the R&D expense ratio was 1.9%, an increase of 0.4 pct year on year.

3. Steady operation, increased accounts receivable and reduced cash flow

The first three quarters of 2024 achieved operating cash flow of 58.25 billion yuan, a year-on-year decrease of 14.0% and a cash income ratio of 0.95, which was basically the same as the same period last year. Accounts receivables/payables and notes rose 20.6%/4.2% year on year, and inventory rose 4.22 billion yuan, respectively, up 26.4% year on year. We believe that the main reason is the increase in the company's 2B business. At the same time, the company adjusted the pace of receipt of payments, which led to a decline in cash flow, and the balance ratio of 45.0% remained at a reasonable level.

4. Investment suggestions:

We believe that the growth rate of traditional telecommunications services is slowing down due to the macro-cycle, and overall profit margins are expected to continue to be unleashed under the declining trend of investment and depreciation and amortization. According to the adjusted profit forecast, it is estimated that 2024-2026 revenue will be adjusted from 393.09/416.68/440.43 billion yuan to 387.61/403.93/421.5 billion yuan, and EPS will be adjusted from 0.29/0.33/0.37 yuan to 0.28/0.31/0.35, respectively, corresponding to the closing price PE of 5.14 yuan/share on October 22, 2024 to 16.32/14.75/13.22 times, respectively. Maintain an “Overweight” rating.

5. Risk warning:

Payback of accounts receivable falls short of expectations; market competition increases risk; risk of industry policy changes; innovative business promotion falls short of expectations; systemic risk.