Matters:

On August 30, Gongjin Co., Ltd. released the “2023 Semi-Annual Report”. In the first half of 2023, it achieved operating income of 4.355 billion yuan (-16.17% YoY) and net profit of 202 million yuan (+5.86% YoY).

Commentary:

Performance is in line with expectations, and profitability has improved markedly. Affected by factors such as the global macroeconomic downturn, operators' capital expenditure and computing power removal, and inventory removal by main equipment vendors, etc., the company's revenue for the first half of the year was under pressure, achieving revenue of 4.355 billion yuan (-16.17% year on year), and revenue for the second quarter was 2,232 billion yuan, an increase of 5.15% over the previous month, showing an improvement trend. In the first half of the year, the company achieved net profit of 220 million yuan (+5.86% year on year), net profit not attributable to parent was 183 million yuan (+4.00% year on year) after deducting net profit from non-return. Benefiting from factors such as structural changes in domestic and foreign orders, improved order quality, continuous decline in raw material costs, and RMB depreciation, etc., the company's profitability increased markedly. In the first half of the year, it achieved a gross profit margin of 13.28%, an increase of 1 percentage point over the previous year; the net interest rate was 4.64%, an increase of 0.97 percentage points over the previous year. The overseas revenue scale of the company's main business in the first half of the year was 2,717 billion yuan, an increase of 8.90% over the previous year, and the proportion of main business revenue increased to 65% (49% in the same period last year). The company's performance in the first half of the year was in line with expectations. In the future, with the continuous optimization of the product structure and the continuous improvement of order quality, profitability is expected to continue to improve.

The leading position in the Netcom business is stable, and the digital communication business has brought about a second curve in the company's growth. In the first half of the year, the company continued to consolidate its performance growth base. The Netcom business successfully broke through some key customers and obtained multiple series of projects. The product revenue structure continued to improve. The share of overseas revenue of the three series products increased significantly compared to the same period last year. Among them, overseas revenue from PON series products increased by 24% over the same period last year, and the gross margin of AP and DSL products increased markedly. In terms of digital communication business, the company's overseas orders further expanded in the first half of the year, with a year-on-year increase of 74%, and the share of overseas revenue increased from 14% to 33%. With the gradual implementation of large AI models and the continuous expansion of data use cases, it is expected that the capital expenditure of operators and Internet companies will continue to lean towards computing power, and the boom in the switch market is expected to continue to rise. The company established the digital communication field earlier, and has advantages in technology, production capacity and supply chain. In the first half of the year, 400G data center switches were shipped in batches, 800G and above switches entered the research stage, and were actively exploring opportunities for AI server cooperation. We believe that the company's digital communication business is expected to further increase its share of key domestic and overseas customers, build a second growth curve, and empower the company's long-term development.

Innovative businesses have blossomed in many places, injecting new momentum into the company's high-quality growth. In the field of mobile communications, the company continued to optimize the layout of the small base stations/private network/FWA market. The base station communication business achieved revenue of nearly 60 million yuan in the first half of the year; the company continued to strengthen the cost control and cost control of private networks in the public security industry to promote the restoration of profitability; the company actively promoted the switching of CPE products from WiFi6 to WiFi7 and steadily shipped them in batches to major overseas operators, with high certainty about future revenue. At the same time, in the first half of the year, the company's revenue scale in the fields of sensor testing and automotive electronics reached the revenue volume for the whole of last year, and the pace of customer expansion continued to accelerate. It is expected that orders will continue to be increased in the second half of the year, injecting new growth momentum into the company's performance.

Profit forecasts, valuations and investment ratings. The company's network communication business continues to develop steadily. In a context where demand for computing power is driving up the prosperity of the switch industry, the digital communication business is expected to maintain a rapid development trend. We expect the company's net profit to be 503, 630, and 742 million yuan in 2023-2025. Referring to the valuation of comparable companies, the company was given 22 times the PE valuation in 2023, corresponding to the target price of 14.00 yuan, maintaining the “strong promotion” rating.

Risk warning: Demand for Netcom equipment has declined, demand for computing power has declined, the company's market share in the digital communication field has fallen short of expectations, and the development of innovative businesses such as mobile communications has fallen short of expectations.