Earnings increased 4.4% YoY in 1H24, largely in line with our estimates, with non-telco enterprise and international market sales driving both top line and gross margin expansion; we expect the trend to continue in 2H24 given the 40% YoY growth in new orders from emerging markets. With relatively conservative expectation on earnings growth and 2024 dividend yield at 6.3%, we view the share attractive at current valuation. Reiterate BUY with target price unchanged at HK$4.93.

Key Factors for Rating

1H24 earnings increased 4.4% YoY to RMB2.1bn, largely in line with our estimate, on the back of 1.7% YoY revenue growth to RMB74.4bn. We believe the company's operations are solid in 1H24 and the lower-than-expected revenue growth is mainly due to the late recognition of revenue from new contracts. New contracts from strategic Emerging Business increased by 40% YoY to RMB38bn, of which 66% were contributed by Non-telco enterprise users.

Domestic non-telco enterprise sales increased 2.5% YoY to RMB32.4bn, consistently delivering the result of the company's strategic focus on digital infrastructure, green and low-carbon, smart city as well as emergency management and security businesses, while domestic telecom operator revenue remained largely flattish YoY in 1H24 as telco cut capex on network investment. Overseas market remains a key growth region, delivering 26% YoY to RMB2bn, mainly driven by the incremental revenue contribution from Middle East and Asia Pacific, and management expects the two regions would continue to contribute incremental sales and lift the overseas market.

Gross profit grew 3.6% YoY in 1H24 with GPM expanding by 0.2ppt YoY, thanks to the GPM expansion from non-telco enterprise business and ACO. NPM remained largely flattish YoY and grew 0.8ppt HoH on the back of disciplined OPEX control and a slight increase in gross margin.

Key Risks for Rating

Macro economy headwinds may become a factor to slow down IT spending from enterprises and municipal governments.

Valuation

Reiterate BUY with target price unchanged at HK$4.93.

1H24 Results Review

1H24 earnings increased 4.4% YoY to RMB2.1bn, largely in line with ourestimate, on the back of 1.7% YoY revenue growth to RMB74.4bn, below our forecast. We believe the company's operations are solid in 1H24 and the lower- than-expected revenue growth is mainly due to the late recognition of revenue from new contracts. New contracts from strategic Emerging Business increased by 40% YoY to RMB38bn, of which 66% were contributed by Non-telco enterprise users.

Telecom Infrastructure Service revenues remained largely stable YoY in 1H24 at RMB37.7bn, accounting for 51% of total revenue. Of which, revenue from BPO (business process outsourcing) services grew 2% YoY to RMB22.2bn, accounting for 30% of total revenue, largely driven by the supply chain business which grew 10.1% YoY. Revenues from ACO (Application, Content and Others) increased by 6% YoY to RMB14.6bn, accounting for 20% of total revenue, triggering the growth of the group revenue, largely driven by software development and system support business which jumped 11.4% YoY.

Domestic non-telco enterprise sales increased 2.5% YoY to RMB32.4bn, consistently delivering the result of the company's strategic focus on digital infrastructure, green and low-carbon, smart city as well as emergency management and security businesses, while domestic telecom operator revenue remained largely flattish YoY in 1H24 as telecos cut capex on network investment. Overseas market remains a key growth region, delivering 26% YoY to RMB2bn, mainly driven by the incremental revenue contribution from Middle East and Asia Pacific, and management expects the two regions would continue to contribute incremental sales and lift the overseas market.

In 1H24, the company's strategic emerging business continued to become the key growth driver, delivering 40% YoY in terms of new contracts revenue to RMB38bn and lifting the contribution to 35% of total new contracts from 27% in 1H23, with major contributions from domestic non-telecom operators.

Gross profit grew 3.6% YoY in 1H24 with GPM expanding by 0.2ppt YoY, thanks to the GPM expansion for non-operator business and ACO businesses. NPM remained largely flattish YoY and grew 0.8ppt HoH on the back of disciplined OPEX control and a slight gross margin expansion.