Event: the company released its annual results in 2010. the annual revenue in 2020 increased by 4.5% to 122.6 billion yuan compared with the same period last year, driven by the company's active expansion of the domestic non-operator market and the continuous optimization of its customer structure. The proportion of domestic operator business, domestic non-operator business and overseas business is 57%, 40% and 3% respectively.

A 0.4% year-on-year increase in gross profit corresponds to a gross profit margin of 11.2%, down 0.5 percentage points from 2019, mainly due to the increase in the rigid cost of epidemic prevention and the strong bargaining power of downstream operators. Net profit rose 1.1% year-on-year, corresponding to a net interest rate of 2.5%, down 0.1 percentage points from 2019. Affected by the epidemic, 1H20's revenue and net profit declined, 2H20's operation improved significantly, and 2H20's revenue and net profit grew by 12% and 10% respectively compared with the same period last year.

The business performance of each operator has been divided in the past 20 years. Based on the project delivery schedule, the overall business growth of operators is expected to return to positive growth in 21 years: the business revenue of domestic telecom operators dropped 3% in 2020 compared with the same period last year, mainly due to the impact of the 1H20 epidemic on the project start-up and delivery process. 2H20 domestic carrier business has resumed year-on-year growth of 1.7%, including 2H20 China Telecom Corporation contribution income up 10% year-on-year, China Unicom and Tower contribution income up 16%, while China Mobile Limited contribution income fell 19% year-on-year, mainly due to China Mobile began to support its own internal supply chain. Integrated 5G infrastructure projects deliver more contribution revenue in 2021, and we expect operator business to return to positive growth in 2021. Non-operator business maintains a strong growth momentum, driving overall profit growth: the domestic non-operator customer-gathering market has more room for growth in the context of digital transformation. Under the background of the epidemic in 2020, non-operator business rose 19% year-on-year. After the impact of the epidemic subsided, non-operator business rose 34% year-on-year. We expect non-operator business to maintain a momentum of rapid growth in 21 years, thus driving the overall net profit growth to a high single-digit level. Operator business is subject to the strong bargaining power of downstream operators and the pressure of continuous decline in gross profit margin. The improvement of overall profit margin in the future depends on the improvement of gross profit margin of non-operator business. In the short term, the gross profit margin of non-operator business is slightly lower than that of operator business due to the market introduction period; in the long run, by increasing the proportion of total package integration projects and the proportion of high-value business, the opportunity to improve the gross profit margin of non-operator business is clearer, which is expected to ensure a stable performance of the company's overall profit margin.

Earnings forecast, valuation and rating: considering that the decline in the share of China Mobile-related businesses affects earnings performance, we have reduced our 21 / 22 net profit by 10% / 13% to 33 / 3.6 billion yuan respectively, an increase of 7.8% / 9.7% respectively over the same period last year. With the end of the epidemic and the successive investment of operators and non-operator markets in the 5G era, the company's 21-year net profit is expected to return to steady growth of high single digits. The latest price corresponds to 6 times PE in 21 years, with a dividend yield of 5.4%, with a high margin of valuation safety. Future high-value business transformation such as non-operator market and software research and development is expected to confirm that the company's performance continues to grow steadily and is expected to drive valuation repair opportunities. With reference to the company's historical valuation range of 6-10 times PE, it is given 8 times PE for 21 years, lowering the target price to HK $4.50 and maintaining the "buy" rating.

Risk tips: 5G construction slows; operator business gross profit margin pressure increases; non-operator business slows.