Incident review

On August 13, 2024, the company released its 2024 mid-year report. In 2024, H1 achieved operating income of 266.091 billion yuan, an increase of 28.69% over the previous year; net profit to mother was 8.739 billion yuan, an increase of 22.04% over the previous year. Among them, Q2 achieved revenue of 147.403 billion yuan in a single quarter, up 46.11% year on year and 24.19% month on month; realized net profit of 4.554 billion yuan, up 12.93% year on year and 8.83% month on month.

Management analysis

North American cloud vendors increased their investment in AI, and the company's cloud computing revenue continued to increase month-on-month:

In the first half of 2024, North American cloud service providers scrambled to release open source models. Leading cloud service providers raised their annual capital expenses one after another and continued to increase AI-related investment. According to the Trendforce research report, annual AI server shipments are expected to reach 1.67 million units in 2024, with an annual growth rate of 41.5%. In the first half of 2024, the company's cloud computing revenue increased 60% year on year, with cloud service providers accounting for 47% of revenue, an increase of 5 percentage points over the same period last year; AI servers accounted for 43% of overall server revenue, and revenue increased by more than 230% year over year.

In the second quarter of 2024, the company's cloud computing revenue accounted for 55% of total revenue, cloud computing revenue increased by more than 70% year over year and more than 30% month over month; AI server revenue increased by more than 270% year on year and more than 60% month on month, accounting for 46% of overall server revenue, and continued to increase quarter by quarter. Meanwhile, in the first half of 2024, general-purpose server revenue increased 16% year over year, and recovery was strong. Furthermore, for the customer's next-generation AI server, the company's production capacity is sufficient, and downstream orders are highly visible. Earlier, it was revealed that the Nvidia GB200 will be delayed. We believe that the time point for mass production of the GB200 corresponding server is next year, and there is still time to verify and adjust. Under the premise that the demand side remains the same, the shipping pace is expected to accelerate after the GB200 issue is resolved, and it is not expected to have a big impact on the company.

High unit growth in the communications and mobile network equipment business sector: Benefiting from network upgrades and iterations, the company's communications and mobile network equipment business segment achieved a high year-on-year increase in revenue in the first half of the year. The year-on-year growth rate in the second quarter reached 20% year-on-year in a single quarter, and revenue from 400G and 800G high-speed switches related to AI servers increased 70% year over year. In the first half of 2024, overall 400/800G high-speed switch revenue increased by 30%, and 800G switches also began shipping in the first half of the year. The company's high-speed switch product portfolio covers multiple deployments of Ethernet, Infiniband, and NVLink switches, which is expected to contribute to growth throughout the year.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue in 2024-2026 to be 561.6/665.9/757.2 billion yuan, and net profit to mother will be 25.3/31/35.9 billion yuan, corresponding PE is 16/13/12 times, maintaining a “buy” rating.

Risk warning

There is a risk that the development of the industrial Internet falls short of expectations, the demand in the telecommunications and enterprise terminal equipment market falls short of expectations, and the development of the edge computing and AI industry falls short of expectations.