Report summary:

From smart cards to digital security, we rely on China Telecom to continue to develop with high quality. The company was founded in 1998 and listed on the main board of the Shenzhen Stock Exchange in 2004; the company implemented an internationalization strategy from 2005 to 2010 and implemented an international layout. From 2011 to 2015, the company completed the expansion of smart cards in multiple fields and became a mainstream provider of public utility cards and financial IC cards; implemented the digital transformation of intelligent manufacturing in the smart card field from 2016 to 2020, and began actively providing product solutions to vertical industries such as energy and power, which was recognized by the industry; after restructuring and integration into China Telecom in 2021, the company was active in IoT digital identification application fields such as industrial IoT, Internet of Vehicles, and consumer electronics have completed a strategic layout, promoted industrial upgrading, increased dual-cycle market development, and presented high-quality development.

The company's financial situation is stable, and the quality of revenue is improving year by year. With the exception of the decline in company revenue and profit in 2020 due to the pandemic, the company's revenue and profit showed a steady growth trend in the rest of the year, and profit growth far outweighed revenue growth. In the first three quarters of 2024, the company's revenue was 1.065 billion yuan, up 1.89% year on year; net profit to mother was 0.119 billion yuan, up 14.49% year on year; looking at the third quarter, the company's revenue was 0.344 billion yuan, which was basically the same year on year, and net profit to mother was 0.04 billion yuan, up 6.10% year on year. As the company further improves its revenue structure and controls internal expense rates, we believe that the company's revenue quality will continue to improve in the future.

The company is vigorously developing a new growth curve based on the company's digital security and platform products. The company has vigorously expanded its high-margin digital security business in recent years, creating a second growth curve. The first is to use eSIM and digital identity security products as a starting point to focus on the four major industries of consumer electronics, vehicle networking, power and energy, and Xinchuang to achieve large-scale business development “from nothing, from existence to excellence, and from superior to strong”; the second is to rely on digital identity security strategies to continuously explore the digital world of “people to people, people to things, and the interconnection of everything” to continuously expand innovative business boundaries in emerging fields such as low-altitude economy, marine IoT, and digital twins. The third is to insist on increasing investment in software system platform research and development, enhancing core competitiveness, gradually expanding the business layout, and breaking through the scale of the business.

We believe that in the current racetrack of the company, the smart card business is expected to remain stable, bringing excellent infrastructure to the company; the digital identity security business is expected to be highly flexible with the construction of various emerging fields; the company has maintained a high-quality development trend in recent years, and the cost ratio is expected to remain stable; and the overall fundamentals will continue to improve. In summary, we expect the company's revenue for 2024-2026 to be 1.414, 1.544, and 1.694 billion yuan, respectively, and net profit to mother 0.194, 0.219, and 0.242 billion yuan respectively, maintaining a “buy” rating.

Risk warning: geopolitical risks, increased market competition, performance forecasts fall short of expectations