Event: the company recently issued the 2023 half-yearly report. In the first half of 2023, the company realized operating income of 4.355 billion yuan, YoY-16.17%; 's net profit of 202 million yuan, YoY + 5.86%, and gross profit margin of 13.28%, an increase of 1.00pct over the same period last year. In a single quarter, 2023Q2 achieved operating income of 2.232 billion yuan, YoY-18.53%; achieved a net profit of 126 million yuan, and YoY-10.66%; gross profit increased by 14.80%, an increase of 0.68pct over the same period last year and 3.12pct compared with the first quarter. In the first half of the year, the revenue side was under pressure due to the market downturn and the de-inventory of main equipment vendors; thanks to the improvement of order quality, the reduction of raw material costs and the company's measures to reduce costs and efficiency, the profit end grew at a high base last year, and Q2 gross profit margin increased significantly compared with the previous year.

Comments: the proportion of overseas income has further increased, and the product structure has been continuously optimized. In terms of business, the overseas income of the company's main business in the first half of the year was 2.717 billion yuan, YoY+8.90%, achieved positive growth, the proportion of main business income rose to 65%, and the gross profit margin of overseas main business increased by 14.62%, which was higher than that of domestic and overall gross profit margin. At the same time, the product structure continued to improve, and the proportion of overseas income of PON, AP and DSL products increased significantly, contributing to the steady growth of the company's profit end. On the expense side, the sales / management / R & D expenses of the company in the first half of 2023 were 0.69 billion yuan, respectively, and the YoY-9.56%/+9.59%/-17.08%, expenses and costs were well controlled.

AI computing burst new opportunities for switches and servers in the field of digital communication. Due to the surge of computing demand caused by AI large model training, switches and servers, as the core equipment of computing network and one of the important foundations of AI, fully benefit from the upsurge of downstream demand and prosperity. According to IDC, the global 200/400GbE switch market grew by 141.3% in the first half of 2023 compared with the same period last year. The AI server market will also grow rapidly under the promotion of large model training, with mainland AI server shipments reaching 284000 units in 2022 and 650000 units by 2027. With years of experience and overseas layout, the company actively develops AI server cooperation opportunities, which is expected to open up new performance growth points.

Netcom business steadily promotes the multi-point blossom, and the digital communication service grows rapidly. In the field of Netcom, in the first half of the year, the company successfully broke through 10G PON JDM projects for overseas A customers, XGSPON+WiFi7 projects for overseas S customers and H customers, WiFi7 projects for domestic R customers & H customers and overseas S customers, Wifi7 10 Gigabit router has been shipped in bulk, FTTR products are expected to enter the trial production in the third quarter of mass production, and project acquisition and product shipment advance steadily. In the field of digital communication, 400G switches have been shipped in bulk, 800G has entered the research level, and overseas revenue from digital communication business has increased by 74% compared with the same period last year, accounting for 33%.

Profit Forecast: Gongjin is a leading broadband terminal manufacturer in China, which is optimistic that the company will benefit from the rapid growth of demand in downstream AI, automotive and other fields. It is estimated that in 2023-2025, the revenue will be 121.47 million yuan, the net profit will be 5.12 billion yuan, and the net profit will be 745 million yuan. Corresponding to EPS0.65/0.79/0.94 yuan, it will be covered for the first time and will be given a "buy" rating.

Risk tips: raw material price fluctuations, exchange rate fluctuations, customer inventory risk.