Core views

In the first half of 2024, the company achieved revenue of 266.09 billion yuan, +28.69% year-on-year, and net profit to mother of 8.74 billion yuan, +22.04% year-on-year. Mainly benefiting from strong growth in AI server demand, cloud computing business revenue increased 60% year over year, while data center AI and iterative network upgrade demand drove a high increase in 400/800G high-speed switches. The company is the world's leading provider of high-end intelligent manufacturing and industrial Internet solutions. In the midst of the booming trend of AI, the company works with the world's top customers to promote the advancement of AI technology and continuously improve its business performance and industry position. As the cornerstone of AI development, computing power plays a critical role in the development of AI. AI servers and high-speed switches are expected to continue to increase in revenue share in the AI development trend. The company is in a leading position in the AI server field, leading in shipping volume, and has deep high-speed switch technology. The company is expected to fully benefit from the rapid growth of the industry in the future.

occurrences

The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 266.09 billion yuan, an increase of 28.69% over the previous year; achieved net profit of 8.74 billion yuan, an increase of 22.04% over the previous year; and net profit after deduction of 8.53 billion yuan, an increase of 13.23% over the previous year.

Brief review

1. Strong growth in AI server demand led to the release of performance in the first half of the year.

In the first half of 2024, the company achieved operating income of 266.09 billion yuan, up 28.69% year on year; achieved net profit of 8.74 billion yuan, up 22.04% year on year; net profit after deduction of 8.53 billion yuan to mother, an increase of 13.23% year on year. The company's revenue for the second quarter of 2024 was 147.4 billion yuan, up 46.11% year on year; net profit to mother was 4.554 billion yuan, up 12.93% year on year.

Cloud computing: AI servers increased significantly year-on-year and month-on-month, and general-purpose servers recovered strongly. Benefiting from increased demand for cloud infrastructure in applications such as generative artificial intelligence, demand for downstream AI servers is growing strongly. In the first half of 2024, cloud computing revenue increased 60% year over year, and cloud service providers accounted for 47% of revenue, up 5 percentage points from 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, 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 over year and more than 60% month on month, accounting for 46% of overall server revenue, and continued to increase quarter by quarter. General-purpose server revenue also increased 16% year over year in the first half of 2024, and recovery is strong.

Communications and mobile network equipment: 400/800G high-speed switches with high amplification. Benefiting from data center AI and network upgrades, communication and mobile network equipment achieved high year-on-year unit growth in the first half of '24. The second quarter increased by up to 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 30% year-on-year, and 800G switch shipments began in the first half of the year.

Industrial Internet: The lighthouse factory continues to be empowered, and a total of 9 have been built. By the end of 2023, there were 153 “lighthouse factories” worldwide, including 62 lighthouse factories in China, and the company participated in the construction of 9. The company has served more than 200 domestic enterprise customers, covering 10 major industries.

2. Increased demand for computing power drives an increase in AI server shipments and drives IDC high-speed switches.

With the rapid development of AI, North American cloud service providers scrambled to release open source models in the first half of 2024. Leading cloud service providers raised annual capital expenses one after another, continuously increased AI-related investment, and promoted cloud infrastructure construction and data center upgrades. According to Trendforce, demand for AI servers from large cloud service providers and brand customers will not stop in 2024. It is estimated that the annual shipment volume of AI servers will reach 1.67 million units in 2024, with an annual growth rate of 41.5%. Artificial intelligence workloads and associated data center infrastructure are growing rapidly, placing higher demands on switch capacity and port rates, driving demand to iterate towards higher performance products. Research by Dell'Oro and IDC shows that the CAGR revenue growth rate of AI data center network switches is expected to reach 55% between 2023-2026, and the explosion in AI computing power demand will also accelerate the upgrade of data center switches to 800G.

In terms of AI servers, the company is one of the few vendors in the industry that can provide a complete solution. Since 2024, the company's cooperative relationships with major global server brands and domestic and foreign cloud service providers have been further deepened. For customers of next-generation AI servers, the company has sufficient production capacity, and downstream orders are highly visible. The company and customers have jointly developed various technologies and solutions such as next-generation AI servers and liquid cooling cabinets to provide powerful computing power support for global high-performance artificial intelligence data centers. In terms of high-speed switches and routers, the company has been deeply involved in the network communication industry for many years and has deep technical accumulation in related fields. The company's high-speed switch product portfolio covers multiple deployments of Ethernet, Infiniband, and NVLink Switches, and is expected to contribute to growth throughout the year. Among them, 800G high-speed switches have begun to be shipped one after another. It is expected that they will begin to increase in volume and contribute significant revenue in the second half of 2024, and the company's product structure is expected to be further optimized.

3. Investment advice: The explosion of AI demand is driving the improvement of the business structure, and performance is expected to achieve rapid growth and maintain the “gain” rating.

We estimate that the company's revenue for 2024-2026 will be 565.676 billion yuan, 646.204 billion yuan, and 737,402 billion yuan respectively, with year-on-year growth rates of 18.75%, 1 4.24% and 14.11% respectively, and net profit to mother of 26.274 billion yuan, 30.89 billion yuan and 34.758 billion yuan respectively, with year-on-year growth rates of 24.88%, 17.57% and 12.52%, respectively. The PE corresponding to the current market value is 16x, 13x, and 12x, maintaining the “gain” rating.

4. Risk analysis

Downstream demand for cloud computing has fallen short of expectations. Currently benefiting from the development of the digital economy and artificial intelligence industry, demand in the cloud computing industry as infrastructure is expected to be released rapidly. If future technology advances less than expected, or if downstream demand falls short of expectations, it may have a negative impact on the company's cloud computing business, causing performance growth to fall short of expectations.

Downstream demand for communications and networking equipment grew less than expected. Currently, domestic 5G construction is at the end of its peak. Overseas 5G construction is on the rise. Global market demand is expected to rise steadily in the future, but if construction progress falls below expectations, it may cause demand growth to slow down or decline, which will adversely affect the company's business scale growth.

The growth of the industrial Internet business fell short of expectations. There is an industry consensus on the current trend of industrial informatization and increased intelligence, but the release of downstream demand is affected by many factors. If industry demand growth slows down in the future, it may hinder the company's industrial Internet business expansion.