1H24 results are in line with our previous expectations

Inspur Information released its 2024 semi-annual report: 1H24 achieved revenue of 42.064 billion yuan, a year-on-year increase of 68.71% (restated caliber); achieved net profit of 0.597 billion yuan, a year-on-year increase of 90.56% (restated caliber); net profit without return to mother was 0.422 billion yuan, which turned a loss into a profit, in line with our previous expectations. Corresponding to the single quarter of 2Q24, the company achieved revenue of 24.457 billion yuan, a year-on-year increase of 58.84%; realized net profit of 0.291 billion yuan, an increase of 152.61% year-on-year; after deducting non-return net profit of 0.182 billion yuan, turned a loss into a profit.

Development trends

High demand for computing power is driving high revenue growth, and I am optimistic that the company will benefit from AI development as a leading server manufacturer in China. By product, the server and component products business achieved revenue of 41.881 billion yuan in 1H24 (+70.02% year-on-year), and the IT terminal and component products business achieved revenue of 0.062 billion yuan. According to Gartner and IDC data quoted in the company's semi-annual report, 1Q24 maintains the leading position in China and second in the world in the server market; it ranked first in liquid cooled servers in China in 2023. We believe that as a leading server manufacturer, the company is expected to benefit from increased computing power demand through a continuous forward-looking layout and product matrix.

1H24 gross margin pressure is dragging down profitability, and operational efficiency continues to improve. 1H24's gross margin fell 3.66 pct to 7.74% year on year, with the gross margin of servers and components falling 3.65 pct to 7.65%. We determine that the main reason the gross margin is under pressure is related to changes in the downstream customer structure. In addition, the company continued to optimize operational efficiency, and 1H24's sales/management/R&D expenses ratio was -1.08pct/-0.83pct/-2.48pct to 1.7%/0.7%/3.3% year-on-year. We believe that as the scale effect of revenue growth gradually becomes apparent, the improvement in the cost ratio is expected to support the company's long-term profitability.

Increase stocking efforts to improve delivery capacity, and look forward to the demand boom in the second half of the year. 1H24 increased its inventory preparation efforts, and its inventory reached 31.9 billion yuan (an increase of 12.8 billion yuan over the end of 23). At the same time, impairment losses on 1H24 assets reached 0.302 billion yuan (1H23 was 0.168 billion yuan), mainly due to price reduction preparations calculated for raw materials, which dragged down profits. We believe that against the backdrop of high demand for AI servers, continued inventory growth guarantees the company's subsequent delivery capacity.

Profit forecasting and valuation

Our net profit for 2024/2025 remained unchanged at 2.1 billion yuan/2.5 billion yuan. Current stock prices correspond to 2024/2025 22.4x/18.7x price-earnings ratios. Maintaining an industry rating and target price of 42.30 yuan, corresponding to a price-earnings ratio of 29.9/25.0 in 2024/2025, there is 34% 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.