4Q22 earnings increased 31.3% YoY, in line with BOCI and market consensus, thanks to 180bps HoH increase in carrier network gross margin attributed to production efficiency gain. We factored in softer topline growth in 23/24E assuming weaker discretionary consumptions, while raising target price to HK$27.43 on higher 23/24E earnings and target P/E multiple at 12x one year forward P/E as we see the company as one of the major beneficiaries of Digital China Policy as well as telco’s buildout in “computation power” and “big connection”. Reiterate BUY.
　　Key Factors for Rating
　　4Q22 earnings increased 31.3% YoY to RMB1.26bn, in line with BOCI estimates and market consensus, despite topline declining 1% YoY to RMB30.4bn.
　　Steady improvement in carrier network gross margin: gross margin from carrier network products improved steadily, up 5ppts YoY to 47.1% in 2H22 and 180bps higher HoH. Continued operation efficiency improvement and lower procurement costs of key components contributed to the margin expansion.
　　2/3 of the company’s server products were sold to telco operators in 2022, and we expect its leadership in telco market will continue in 2023 when telecom operators focus their CAPEX in building “computation power”. The rest of the company’s server products were sold to government and enterprise customers last year, as the company leveraged its server products to expand to data base and other industrial applications and software product.
　　We revised down our 2023-24E revenues by 5.9% and 6.9%, mainly due to slower growth of consumer product sales and possible delays in network construction projects. On the other hand, we revised up our 2023/24E earnings by 1.2%, 2.2% as we factor in the sustained gross margin improvement especially in carrier network products.
　　Key Risks for Rating
　　Supply chain disruption and shortage of key components and semiconductor products are the primary uncertainties on the company’s earnings.
　　Valuation
　　We reiterate BUY and raise target price from HK$20.51 to HK$27.43 as we move up our target P/E multiples from the mean of historical trading range at 10.6x to the mid-point of mean and +1 std deviation at 12x one year forward P/E, as the higher earnings visibility from improving gross margin trend at carrier network equipment is solidified by the high proportion of proprietary semi- conduct and components.
　　Key Highlights of this Report
　　2022 annual results review.