Report summary:
Mergers and acquisitions of the world's leading optical module companies and entering the high-speed optical module business. The company has intervened in the high-speed optical module business through epitaxial mergers and acquisitions in recent years, and has become a new force in the optical module industry that cannot be ignored. Through the acquisition of assets related to leading overseas optical module manufacturers and its own independent research and development, the company currently has leading R&D and production capacity for high-end optical modules related to data centers and 5G frontrunk-related high-end optical modules. The LR4/CWDM100G, 200G/400G PAM4 and 100G LAN WDM, and 5G front-haul series products obtained by the company are currently mainstream models or are the next generation's development direction. In February 2020, the company announced a fixed increase plan. It plans to raise no more than 750 million yuan to build 100G, 200G, 400G, and 5G wireless communication optical module projects. After the fixed increase plan is implemented, production capacity for related products will be expanded to seize market share.
The early deployment of 5G small base stations is expected to fully benefit from the new volume of 5G small base stations. The company has been deeply involved in the small base station market since the 4G era. In Japan and South Korea, where the small base station market is relatively developed, the company has formed a stable supply channel. At the same time, 5G small base stations were deployed in advance. Currently, the company's 4G/5G indoor small base stations have been shipped in batches to Nokia. With the start of large-scale 5G construction in 2020 and the gradual advancement of 5G commercial use, the company is expected to take advantage of its first-mover advantage and fully benefit from the growing demand for small 5G base stations.
The traditional main business is developing steadily, and the double gigabit strategy drives the company's growth. The company's traditional main business is telecom access terminal equipment. In recent years, due to the end of large-scale FTTH construction, industry sentiment has declined, but with the advancement of optical fiber broadband access technology, the gradual application of emerging high-bandwidth businesses such as high-definition video, smart homes, and VR/AR, the company's traditional business has re-entered an upward cycle of prosperity.
Investment advice
The company's optical module assets have been basically integrated, the upstream and downstream aspects of the industry have been straightened out. Major customers are expected to continue to break through, and the optical module industry is expected to start growing in 2020 due to large-scale 5G construction and increased demand for cloud computing. The company has deployed 5G small base stations ahead of schedule. With the development of large-scale 5G construction and the increase in 5G users, the related small base station business is expected to become the company's new profit growth point in the next two years. We predict that in 2019/2020/2021, the company will achieve net profit of 0.20/132/261 million yuan and EPS of 0.15/1.02/2.03 yuan. Listed companies related to optical modules and access equipment in the same industry as the company were compared. Comparable with the company's median PE of 38.8 times in 2020, the median PE of 28.9 times in 2021, the company's PE 35.5 times in 20 years, and 17.9 times PE in 21, which is below average. Considering that the company's optical module and 5G small base station business will experience rapid growth this year and next two years, a certain valuation premium should be given and given a “recommended” rating.
Risk warning
The worsening of the overseas epidemic and the weakening of demand exceeded expectations; the introduction of new customers and the scale of supply fell short of expectations; increased competition in the industry led to a decline in gross margin that exceeded expectations.