FY23&1Q24 performance exceeded our previous expectations
The company released its 2023 annual report and 2024 quarterly report: in 2023, it achieved revenue of 65.867 billion yuan, a year-on-year decrease of 5.41% (restated caliber); realized net profit of 1.783 billion yuan, a year-on-year decrease of 14.54% (restated caliber); realized net profit without return to mother of 1,118 billion yuan, a year-on-year decrease of 35.87% (restated caliber), higher than our previous expectations. We determined that the main reason was VAT deduction of 443 million yuan. Corresponding to the single quarter of 4Q23, the company achieved revenue of 17.77 billion yuan, an increase of 6.04% over the previous year; net profit to mother was 996 million yuan, an increase of 86.49% over the previous year. In the 1Q24 quarter, the company achieved revenue of 17.607 billion yuan, a year-on-year increase of 85.32% (restated caliber); realized net profit of 306 million yuan, an increase of 64.39% year-on-year (restated caliber), higher than our previous expectations. We determined that the main reason was the accelerated release of computing power demand.
Development trends
The business showed an improvement trend in the single quarter, and it is optimistic that the company will benefit from the rapid expansion of AI computing power demand. By product, the server and component products business achieved revenue of 65.240 billion yuan (-5.53% YoY), and the IT terminal and parts products business achieved revenue of 393 million yuan (YoY +29.77%); by region, domestic business achieved revenue of 56.319 billion yuan (-6.87% YoY) in 2023, and overseas business achieved revenue of 9.547 billion yuan (YoY +4.17%). Since the second half of 2023, the company's revenue has shown a gradual recovery trend, with 1Q24 revenue growing at a year-on-year rate of over 80%. We have seen that three operators are starting to collect AI servers one after another. Among them, China Telecom (2023-2024) is expected to purchase 4,175 units, China Unicom headquarters will start collecting AI servers for the first time (estimated procurement of 2,503 units), and China Mobile will start collecting new intelligent computing centers in 2024-2025 (estimated procurement of 7,994 units). We are optimistic about the rapid expansion of computing power infrastructure driven by AI models. We believe that as a leading server manufacturer in China, the company is expected to benefit from the increase in computing power demand through a continuous forward-looking layout and product matrix.
The gross margin fluctuated, and efforts to prepare goods were increased to improve delivery capacity. 4Q23 gross margin increased 2.51 pct year on year to 11.0%, and 1Q24 gross margin fell 4.93 pct year on year to 8.1% year on year. We determine that gross margin fluctuations may be related to the downstream customer structure in a single quarter. In addition, net operating cash flow in 2023 was -71.30% year-on-year to $520 million, mainly due to increased operating preparation and purchase payments. Inventory at the end of 2023 was +27.22% to 19.115 billion yuan compared to the end of 2022, and 1Q24 inventory further increased to 24.290 billion yuan. We are optimistic that the company will improve its delivery capabilities and seize the development opportunities of the computing power industry.
Profit forecasting and valuation
Due to the accelerated release of computing power demand, we raised net profit to mother in 2024 by 26% to 2,076 billion yuan, and introduced net profit of 2,483 billion yuan in 2025 for the first time. The current stock price corresponds to 2024/2025 27.3 times/22.8 times P/E. Maintaining an outperforming industry rating, the target price was raised 26% to 42.30 yuan based on a 30-fold P/E increase in 2024, corresponding to 25.1 times P/E in 2025, with 10% upside compared to the current stock price.
risks
AI technology development and application implementation/cloud computing power infrastructure investment falls short of expectations, supply chain risks.