Main points of investment

Event: on August 25, 2023, the company made an initial public offering and a letter of intent to list shares in Science and Technology Innovation Board. On September 14, the company was officially listed in Science and Technology Innovation Board.

The volume of income is increasing year by year, and the investment in R & D remains at a high level. The company is a leading Ethernet switching chip design enterprise in China, mainly engaged in the research and development, design and sales of Ethernet switching chips and supporting products. The company's operating income scale is growing rapidly year by year, and has formed a strong sustainable management ability. The company's operating income from 2020 to 2022 was 2.64 pound 459 million yuan respectively. The average annual compound growth rate of operating income from 2020 to 2022 was 70.60%. From January to June 2023, the company's revenue was 640 million yuan, an increase of 82.88% over the same period last year. During the reporting period, the company attached great importance to R & D investment, and the amount of R & D expenses continued to increase in each year. From 2020 to 2022, the company's R & D expenses were 1.11 billion yuan, accounting for 41.97%, 39.61% and 34.39% of operating income in the same period, respectively. The total number of shares issued by the company is 50 million shares, of which 12 million shares are issued online, the issue price is 42.66 yuan per share, and the total amount raised is 2.133 billion yuan, of which 1 billion yuan will be used for the research and development of new generation network switching chips and mass production projects, routing switching converged network chip research and development projects and supplementary liquidity projects.

High-end products break overseas monopoly, and multi-scene applications form a product matrix. According to Zhenshi Consulting data, in 2020, China's commercial Ethernet switching chip market in terms of sales caliber, Broadcom Ltd, Mei Man and Ruiyu ranked in the top three with a market share of 61.7%, 20.0% and 16.1% respectively, accounting for a combined market share of 97.8%. Shengke Communications has a market share of 1.6%, ranking fourth in China's commercial Ethernet switching chip market, and there is a wide space for domestic alternatives.

In terms of products, the company has formed a rich series of Ethernet switching chip products and supporting products, and provides industry customers with Ethernet switching chip modules and customized product solutions based on self-developed Ethernet switching chips. It mainly covers the switching capacity of 100Gbps~2.4Tbps and the port rate of 100M~400G, and has been applied on a large scale in enterprise networks, operator networks, data center networks and industrial networks. The company developed TsingMa.MX series switching capacity up to 2.4Tbps, supporting 400G port rates, supporting 5G load carrying characteristics and data center characteristics; GoldenGate series chips have switching capacity up to 1.2Tbps, supporting 100G port rates, and supporting visual and lossless network characteristics. In terms of high-end products, Broadcom Ltd and other manufacturers have invested in the research and development of Ethernet chips for ultra-large-scale data centers with the highest switching capacity of 51.2Tbps. The company is studying the Arctic series for ultra-large-scale data centers and has carried out trial production.

The prosperity of the track is improved and the domestic substitution is superimposed, and the company has a broad market space. The demand for computing power in the large AI model is surging, and the switch, as the hub of the computing network, is booming in the industry. According to IDC, the global 200/400GbE switch market grew by 141.3% in the first quarter of 2023 compared with the same period last year. In March 2023, China Mobile Limited released the top ten key technological research tasks in 2023, formed 54 joint teams to jointly tackle key problems in computing networks, AI models, and localization, among which the third hot spot was the autonomous controllability of the network management system to promote the large-scale application of domestic software and hardware on the network. At present, the company has the capability of designing high-density and high-performance ports from 100m to 400G, and TsingMa.MX series products have a port rate of 400G, combined with a high-performance Ethernet switch chip architecture with bandwidth extensibility and process mobility; the Arctic series supporting 800G ports is in trial production.

The Ethernet switching chip independently developed by the company has entered the supply chain of domestic mainstream network equipment manufacturers, and has established long-term cooperative relations with end customers such as Xinhua third, Ruijie Network, Maipu Communication and other terminal customers through direct sales and distribution mode. the Ethernet switching equipment produced with the company's chip as the core has been applied on a large scale in major domestic operators as well as financial, government, transportation, energy and other major industries.

Investment advice: the company is in the switch chip track, the demand for high-speed switches is increasing and the process of domestic replacement is accelerating, we believe that the company is expected to maintain rapid development in the future. It is predicted that the company's revenue from 2023 to 2025 will be 10.98 million yuan (14.74 billion yuan), an increase of 43.1 percent (34.2%) over the same period last year and 16.9 percent (16.9%) over the same period last year. The company's net profit will be-1 million yuan in 31-9-34, with a year-on-year increase of-6.0 percent (128.4 percent) and 279.7 percent (corresponding to EPS-0.08/0.02/0.08 yuan). For the first time, it will be given an "overweight-B" rating.

Risk hints: the speed of research and development is not as fast as expected; market competition continues to intensify; domestic substitution is not as expected