Incidents:

The company released its three-quarter report for 2024. In the first three quarters of 2024, it achieved operating income of 90.04 billion yuan, an increase of 0.7% over the previous year; net profit to mother of 7.91 billion yuan, an increase of 0.8% over the previous year; and net profit after deducting non-return to mother of 6.9 billion yuan. Looking at the third quarter of '24, we achieved operating income of 27.557 billion yuan, a year-on-year decrease of 3.94%, a year-on-year net profit of 2.174 billion yuan, a year-on-year decrease of 8.23%, and realized net profit of 1.935 billion yuan after deduction of non-return to mother.

Steady management, deepening “connection+computing power”. In the first three quarters of 24, the company operated accurately, pragmatically and steadily, actively grasped the development pace of the ICT industry, accelerated technological and market innovation, and improved its own management efficiency and operational efficiency. Overall operations have remained steady. Judging from various businesses, the domestic operators' network business is under overall pressure due to the impact of the investment environment, and the international market continues to break through the big country's T and maintain double-digit growth. At the same time, the company's consumer and government business have both achieved rapid growth.

Gross margin declined year-on-year, and cost control was effective

The company's gross profit margin for the first three quarters was 40.43%, down 3.24 pct from the same period last year. Looking at the Q3 quarter alone, the gross profit margin was 40.35%, down 4.28 pcts from the same period last year. We believe it is mainly affected by the product structure, and the share of high gross margin operator business has declined significantly. In terms of expenses, the company's sales, management, and R&D expenses all declined year-on-year in a single quarter. The company's financial expenses increased year-on-year in January-September, mainly due to exchange rate fluctuations. At the same time, the company's impairment losses have also narrowed markedly over the same period last year, and the company's expense control has been quite effective. We expect a steady increase in profitability after the gross margin remains stable.

Continue to increase research and development, and deepen the computing power layout to help AI become realistic

The company spent 18.64 billion yuan on R&D in the first three quarters, accounting for 20.7% of revenue, and promoted technological innovation such as 5G-A, all-optical networking, and full-stack intelligent computing. In the field of computing power, the hardware side company launched a “one machine, multi-core” open architecture AI server, compatible with mainstream GPUs, and launched 2*200G network cards based on self-developed chips; the model application side developed the Nebula series of large models, which effectively drive R&D efficiency; the big communication model was applied in scenarios such as anti-fraud, heavy insurance, new calls, and experience guarantee; in terms of application ecology, establish an open intelligent computing laboratory to provide GPU interconnection, optimization, and large model compatibility testing and certification from multiple manufacturers. In addition, the company also continues to innovate in the fields of 5G-A, optical communications, automobiles, etc., and launched 800G OTN pluggable solutions, etc., to build core competitiveness. We believe that under the big wave of digital intelligence industry opportunities, the company's R&D capabilities are outstanding, and the annual R&D investment of more than 20 billion enables the company to have full-stack solution capabilities and self-developed chip capabilities to seize the rapid development of industry opportunities.

Profit forecasts and investment suggestions:

Overall, the short-term pressure on operator business is expected to stabilize in the future, and government and enterprise businesses will benefit from demand for computing/connectivity/software, etc., leading to accelerated growth. At the same time, as the company increases efficiency and controls fees, the scale effect is expected to continue to show. The company is expected to maintain steady revenue throughout the year, and profitability is expected to increase steadily under cost control. According to the company's operating situation in the first three quarters, the operator's overall capital expenditure was weak and the company's comprehensive gross margin was under year-on-year pressure. The company's 24-26 performance was adjusted to 9.6/10.6/11.6 billion yuan (previous value was 10.3/11.4/12.5 billion yuan), corresponding to a valuation of 16/14/13 times, maintaining a “buy” rating.

Risk warning: macropolitical risk, risk of impairment, risk of computing power development falling short of expectations, risk of operator base station construction pace, country risk and intellectual property risk, etc.