Incidents:

On August 13, IFF released its 2024 Interim Report. In 2024 H1, the company achieved operating income of 266.091 billion yuan, or 28.69% year-on-year, and net profit to mother of 8.739 billion yuan, or 22.04% year-on-year.

Among them, with 2024Q2, the company achieved operating income of 147.403 billion yuan, 46.11% YoY, 24.19%, and net profit to mother 4.554 billion yuan, or 12.93% YoY and 8.83%.

Comment:

Revenue from AI servers and high-speed switches grew rapidly, with revenue under short-term pressure. AI hardware was the core driver: 1) The cloud computing business benefited from the continued expansion of AI hardware demand, with revenue growth of 60% in the first half of the year, with cloud service provider revenue accounting for 47%, an increase of 5 percentage points over the same period last year; AI servers accounted for 43% of overall server revenue, and revenue increased more than 230% year over year; general server revenue also increased 16% year over year, and demand recovery was strong.

2) The communications and mobile network equipment business also benefited from AI-driven network upgrades and achieved high year-on-year unit growth in the first half of the year. Among them, overall 400/800G high-speed switch revenue increased 30% year over year, 800G switches began shipping in '24, and the products covered the composite structure of Ethernet, IB networks and NVLink Switches. 3) Industrial Internet business. With years of accumulation in the field of intelligent manufacturing, the company continues to use AI technology to drive transformation and upgrading, and its innovative strength continues to be recognized by the industry. The profit side's comprehensive gross margin contracted slightly, and the cost ratio was well controlled during the period: 1) In terms of gross margin, due to changes in the business structure, the comprehensive gross margin shrank to 6.73%. 2) In terms of the cost ratio for the period, sales, management, R&D, and finance cost ratios decreased by 0.07/0.07/0.55/ -0.36 pcts year-on-year, respectively.

As a leading enterprise in the digital economy, it will fully benefit from the explosion in demand for AI hardware and end-side deployment. With the iteration of large models, AI+ application innovations continue to be implemented in various industries, and will further drive the growth in demand for computing power. Demand for AI technology hardware such as servers and high-speed switches is booming. At the same time, as AI advances to the application side, demand for AI terminal hardware such as AI phones continues to explode. According to IDC data, global AI phone shipments will reach 0.17 billion units in 2024, and AI phones in China will also maintain a rapid growth trend, accounting for more than 50% in 2027. We believe that through stable customer relationships, IFF will fully benefit from the explosion of demand for basic and end-side hardware under the AI wave.

Investment advice and profit forecasting

As the computing power base and end-side hardware requirements continue to advance, we believe the company will fully benefit from the expansion of hardware facilities under the wave of digital intelligence. We expect that in 2024-2026, the company's net profit to mother will be 25.649, 29.905, and 34.534 billion yuan, respectively, and the corresponding PE valuations will be 17x, 15x, and 13x, respectively.

Maintain a “buy” rating.

Risk warning

Risk of macroeconomic fluctuations, risk of industry fluctuations, risk of exchange rate fluctuations, risk of relative concentration of customers