Incident: On the evening of August 26, the company released the “2024 Semi-Annual Report”. 24H1 achieved operating income of 37.951 billion yuan (yoy +5.29%), achieved net profit due to mother of 1 billion yuan (yoy -2.13%), realized net profit of 0.894 billion yuan (yoy +5.78%) after deducting non-return to mother, and achieved EPS of 0.35 yuan (yoy -2.13%).

Revenue increased steadily, comprehensively consolidating computing power and the ability to connect to the “double foundation” full stack. 24H1 achieved revenue of 37.951 billion yuan (yoy +5.29%), achieved net profit of 1 billion yuan (yoy -2.13%), and realized net profit of 0.894 billion yuan (yoy +5.78%) after deducting non-return to mother, mainly 1) 23H1 was affected by heavy tax rebates and settlement of accounts, and income tax expenses were low (0.004 billion yuan), 24H1 returned to normal (0.157 billion yuan); 2) 24H1 company government subsidies It was 0.132 billion yuan (23H1 was 0.331 billion yuan); 3) 24H1 calculated various impairment losses of 0.507 billion yuan (yoy +50.56%), which had an impact on net profit attributable to mother of 0.212 billion yuan (23H1 impact was 0.145 billion yuan). In the first half of the year, the company actively grasped the market and industry opportunities brought by AIGC, accelerated the implementation of AIGC's overall solutions, and maintained steady revenue growth.

Looking at a single quarter, Q2 achieved revenue of 20.945 billion yuan (yoy +7.32%), net profit attributable to mother of 0.587 billion yuan (yoy +0.60%), and realized net profit of 0.551 billion yuan (yoy +8.46%) after deduction.

The revenue of Xinhua 3 24H1 continues to grow, and the self-service channel business continues to grow at a high rate in international business. 24H1 Xinhuasan achieved revenue of 26.428 billion yuan (yoy +5.75%) and realized net profit of 1.82 billion yuan (yoy -0.20%) to mother, of which:

1) Domestic government and enterprise revenue reached 20.212 billion yuan (yoy +8.31%), mainly due to increased demand for server and switch procurement brought about by the construction of the Internet, government and enterprise customer-side intelligent computing centers; 2) Domestic operators' business revenue reached 5.019 billion yuan (yoy -4.14%), mainly due to the impact of procurement pace, which is expected to release 24H2 orders;

3) International business revenue of 1.198 billion yuan (yoy +9.51%), of which H3C brand products and services independent channel business revenue reached 0.416 billion yuan (yoy +61.22%).

Other subsidiary aspects: 1) Ziguang Digital: 24H1 achieved revenue of 10.54 billion yuan (yoy +5.38%), achieving net profit of 0.124 billion yuan (yoy +14.90%); 2) Ziguang Software: 24H1 achieved revenue of 1.316 billion yuan (yoy -16.78%), achieving net profit of 0.001 billion yuan (yoy -4.91%); 3) Ziguang Cloud: 24H1 achieved revenue of 0.573 billion yuan (yoy -4.91%), Net profit of 0.132 billion yuan was achieved, and losses narrowed year-on-year. 24H1 Ziguangyun successively won bids for various key projects such as government cloud, medical cloud, and financial cloud, and the full-stack localization capacity was continuously strengthened.

Gross margin fluctuates slightly due to changes in revenue structure and product structure. 24H1 achieved a gross margin level of 19.03% (yoy-1.29pct) and achieved a net margin level of 4.55% (yoy-0.45pct), mainly due to the revenue structure (24H1 Internet customers are growing relatively faster) and product structure (the share of IT products continues to increase). It is expected that as 1) the market position of companies at the server level continues to improve; 2) the competitive pattern of the white-box switch market at the switch layer evolves, the overall gross margin is expected to recover.

By product, the gross margin of 24H1 ICT infrastructure and services achieved a gross margin level of 24.37% (yoy-1.06pct), and IT product distribution and supply chain services achieved a gross margin level of 6.26% (yoy-1.64pct).

The results of cost reduction and efficiency were remarkable, and expenses fell rapidly during the 24H1 period. The total cost ratio of 24H1's four items is 13.62% (yoy-2.86pct), with a sales expense ratio of 5.45% (yoy-1.09pct), management expense ratio of 1.22% (yoy-0.11pct), and R&D expenses ratio of 6.35% (yoy-1.34pct). The company continues to optimize the organizational structure, improve operational efficiency, and achieve remarkable cost management results.

Operating cash flow fluctuates in the short term due to short-term fluctuations in procurement and preparation, and on-hand orders continue to be abundant. 1) In terms of operating cash flow: 24H1's net operating cash flow was -3.219 billion yuan (yoy -45.85%), mainly due to an increase in subsidiary procurement payments. 2) Inventory side: 24H1's inventory balance is 30.473 billion yuan (yoy +53.75%, including 14.222 billion yuan (yoy +47.41%) for inventory products and 11.295 billion yuan for raw materials (yoy +72.40%)); 3) In terms of contract liabilities: 24H1 is 9.61 billion yuan (yoy +37.47%)

The acquisition of 30% of Xinhuasan's shares is progressing smoothly, and will increase the profits of listed companies later. At present, the company has completed stock exchange inquiries and responses, shareholders' meeting reviews, capital raising and related government approval procedures, and the overall equity settlement is progressing smoothly. Subsequently, with the completion of the overall Q3 transaction, the company's shareholding ratio in Xinhua 3 increased from 51% to 81%, which will further increase the profits of listed companies, strengthen comprehensive ICT capabilities, and the valuation will also usher in a new round of restoration.

Investment advice: Leading domestic ICT sector, “cloud-network-security-storage-terminal” full-stack layout, simultaneous development of government and enterprises+operators+overseas markets, and broad room for subsequent growth. Excluding H3C's 30% equity share balance, the company's net profit due to mother is estimated to be 2.184 billion yuan, 2.513 billion yuan, and 2.895 billion yuan respectively in 2024-2026, corresponding to PE of 24.8 times, 21.5 times, and 18.7 times, respectively, maintaining the “Highly Recommended” rating.

Risk warning: The digital transformation of the industry falls short of expectations, the development of cloud computing falls short of expectations, and operator investment falls short of expectations.