Pioneer of domestic production of Ethernet switching chips. The company is a leading Ethernet switching chip design enterprise in China. It specializes in switching chips and their supporting products, and is positioned as a high-end production line. Since 2005, it has developed its own switching chips. It has now formed a rich switching chip product sequence, covering 100G~2.4T switching capacity and 100M~400G port rates, and breaking the long-term monopoly pattern of international giants. In 2020, the company ranked first among domestic manufacturers in the Chinese commercial switching chip market. On the financial side, benefiting from downstream application drivers, the company's revenue maintained a CAGR of 71% in 20-22. With vigorous R&D and market development in the early stages, it has not yet achieved profit. On the customer side, the company has successfully entered the industrial chain of companies such as Xinhua 3, Ruijie Network, Maipu Technology, and ZTE.
China's commercial switching chips are looking at a space of 17.1 billion yuan, and data centers will become a must-compete place for future soldiers. A switching chip is a special chip used to process large amounts of data and message forwarding, and is the core component of a switch. In terms of switches, the global switch market bucked the trend in '22, and we think the growth rate of the Chinese market is expected to be even higher.
In terms of switching chips, commercial vendors are leading self-use manufacturers in future development with their independence and exclusivity. Insight Consulting predicts that China's commercial switching chip market is expected to grow from 9 billion yuan in 20 to 17.1 billion yuan in 25. At that time, switching chips used in data centers will account for more than 70%, and high-speed chips above 100G will exceed 40%.
Digital economy policies have been strengthened, operators+clouds are promoting infrastructure, and new scenarios have emerged to jointly drive the industry's boom upward. Looking at the macro level, the digital economy continues to drive, and demand for network equipment benefits from being boosted by Eastern, Western, and Computing Power Network policies.
On a micro-view, cloud vendors maintain CAPEX resilience and are expected to pick up in the future. Operators are expanding their investments in computing power networks and industrial digitalization, benefiting the entire industry. Looking at it incrementally, new scenarios have been introduced to promote the development of edge computing and boost demand for network equipment. Driven by demand, the switching chip industry as a whole is developing towards high speed+high capacity.
There is no time to delay replacing domestic production, and companies are catching up with large overseas manufacturers at an accelerated pace. In the future, with the advantages of first-mover and localization, the company can form a close industrial chain with domestic network equipment vendors. The chip industry is supported by various national policies, and the company's inclusion in the entity list once again confirms the necessity of replacing domestic production. Compared with Broadcom and Meiman, the company's application in the data center field is still in its infancy. The company's Arctic series chips have entered the trial production stage and are expected to be launched in 24. Successful development will provide benefits for the company to enter large-scale data center applications and increase market share. Currently, mainstream equipment vendors such as Ruijie Network still supply internal core switch chips from overseas, and there is plenty of room for domestic replacement. We estimate that Ruijie's internal domestic replacement space in '21 was 798 million yuan.
Risk warning. High-end product development progress fell short of expectations, international chip foundry stability fell short of expectations, and cloud and operator capital expenses fell short of expectations.