Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, revenue was 90.045 billion yuan, up 0.73% year on year, and net profit to mother was 7.906 billion yuan, up 0.83% year on year.

2024Q3 achieved revenue of 27.557 billion yuan, a year-on-year decrease of 3.94%, and net profit to mother of 2.174 billion yuan, a year-on-year decrease of 8.23%.

Reviews:

The company is a leading global provider of integrated communications and information technology solutions. The company has complete, end-to-end products and solutions for the ICT industry, integrating “design, development, production, sales and service”, focusing on operator networks, government business, and consumer business. 2024H1, the revenue ratios of operator networks, government business, and consumer business were 59.7%, 14.7%, and 25.6%, respectively. In the field of operator networks, in the domestic market, the company is accelerating the shift from full connectivity to “connection+computing power” to fully expand the market space; in the international market, the company is strengthening the layout and expansion of key products such as wireless and wired, actively promoting new businesses and maintaining the growth trend around the big power and big T strategy. In the government and enterprise markets, the company integrates resources to strengthen first-tier market expansion capabilities; launches next-generation intelligent computing servers, high-end storage, and data center switches. The consumer business mainly includes home terminals and mobile phone products. The company proposed “AI for All” and laid out all AI terminals.

Changes in the revenue structure put pressure on gross margins in the short term, and cost control has been effective. In the first three quarters of 2024, the company's gross margin was 40.43%, down 3.24pct year on year; 2024Q3 gross margin was 40.35%, down 4.28pct year on year. The pressure on the company's gross margin is mainly due to the combined effects of changes in the revenue structure, the increase in the gross margin of operator networks and consumer businesses, and the decline in the gross margin of government and enterprise services. In the first three quarters of 2024, the company's cost rate for the period was 31.10%, down 1.12 pct year on year. Among them: sales expenses rate, management expense ratio, and financial expense ratio -0.63pct, -0.67pct, +0.81pct year on year. The company's overall cost control was effective, marketing investment decreased, and management efficiency improved; the company's R&D cost rate was 20.7%, -0.62pct year on year. The company increased R&D investment in computing power products and solutions, including intelligent computing servers. A full-stack global intelligent computing solution.

In the field of traditional operator networks, the company maintains a leading position in wireless and wired core products; in the field of operator computing power networks, the company focuses on building intelligent computing power. From January to November 2024, domestic telecom business revenue totaled 1594.7 billion yuan, an increase of 2.6% over the previous year. The large-scale construction of 5G in the domestic market has entered a stable period. 5G-A is gradually being commercialized, 400G optical transmission networks are being further built, and computing power centers are rapidly deployed. Carrier investments focus on wireless and wired broadband networks, as well as new business areas such as new data center construction, network intelligence, and green and low-carbon emission reduction.

2024H1, the company's operators' network revenue fell 8.6% year on year, mainly affected by the overall domestic investment environment. 1) Traditional operator networks: The company's domestic market share is stable as a whole. Core network products maintain a domestic duopoly pattern, and international business branches in many countries in Africa have increased their share. Cable products and fixed network products maintain a leading position in the world. Optical transmission products, the domestic market completed large-scale commercial use of the world's first 400G all-optical interprovincial backbone network. The international market size surpassed mainstream operators in Turkey, Nigeria and other countries; it won the bid for China Mobile and China Telecom's core router collection project. 2) Carrier computing power networks: servers, storage, and computing servers maintain the lead among domestic operators and win the bid for the China Mobile PC server collection project; in the international market, the server business seizes opportunities for domestic operators to go overseas and open up overseas sales channels. Data center switches, frame switches maintain a leading position in the industry with self-developed core components; box-type switches won the bid for China Unicom and China Telecom's procurement projects.

The data center is equipped to launch innovative products such as immersion liquid cooling, cold plate liquid cooling, high-power inter-steam, and integrated power modules. Cloud computer. The company released the “Xiaoyao” series of 5G cloud computers, with the largest share of the domestic operator's cloud terminal market.

In the government and enterprise market, the company launched competitive products such as next-generation intelligent computing servers, high-end storage, and data center switches. Currently, there are more than 0.015 million domestic “5G+ industrial Internet” projects, achieving full coverage of 41 industrial categories. As 5G evolves to 5G-A, connectivity and application upgrades drive productivity restructuring, accelerate the in-depth development of digital transformation and development in all walks of life, and build a new quality of productivity in the industry. The company seizes the incremental opportunities in the government and enterprise market brought by computing power and credit innovation to drive rapid revenue growth. 2024H1, the company's government and enterprise business revenue increased 56.1% year over year, mainly due to the increase in server and storage revenue. Server and storage, the company focuses on leading customers in the Internet, finance, and power industries. It has implemented the JDM (Joint Design and Manufacturing) deep cooperation model to further cultivate inventory, break through increments, and achieve revenue scale growth.

Data center switches have accelerated the deployment of the Internet and financial industries, and domestic orders have increased rapidly over the same period last year. The data center is equipped to go overseas hand in hand with domestic companies, and the scale continues to increase in the Indonesian market. Furthermore, the company focuses on new opportunities such as urban lifelines, emergency response, and vehicle-road cloud integration to seize new hot spots in the low-altitude economy and achieve breakthroughs in government and enterprise affairs.

In the consumer business field, the company focuses on multi-terminal intelligent interconnection and ecological expansion to create AI-driven full-scene smart ecosystem 3.0. With 2024H1, the company's consumer business revenue increased 14.3% year over year, mainly due to the increase in revenue from household terminals and mobile phone products. In home terminals, the company strengthens the advantages of self-developed chips and full-form solutions, seizes market opportunities for rapid domestic FTTR construction and international Wi-Fi 7 router product upgrades, and increases market share.

In terms of mobile phones and mobile internet products, the global consumer electronics market has recovered, and AI technology has been integrated into smartphones, becoming a new hot spot for technological innovation in the mobile phone industry. Driven by consumer demand for enhanced features such as AI assistants and end-side processing, Canalys expects the 2023-2028 AI mobile phone market to have a CAGR of 63%. The company focuses on differentiated innovation and cost-leading strategies, covering mobile phones, tablets, notebooks and mobile internet devices, and launched more industry-first products to meet the needs of individual users or industry professionals.

Investment advice: The company is a leading global communications equipment manufacturer. The core competitiveness of the first curve business, which mainly focuses on wireless and wired products, continues to improve, while also accelerating the expansion of the second curve business represented by computing power and mobile phones. Continued construction of domestic computing power will bring new growth to the company's server, switch and other businesses. We expect the company's net profit to be 9.592 billion yuan, 10.201 billion yuan, and 11.006 billion yuan in 2024-2026, corresponding to PE of 20.35X, 19.13X, and 17.73X, covered for the first time, giving it a “buy” rating.

Risk warning: Changes in the international environment; AI development falls short of expectations; telecom operators' capital expenditure falls short of expectations; intellectual property risks.