Summary of the report:
Shengke Communication is a leading Ethernet switch chip designer in China. In 2022, the company's revenue was 770 million yuan, with a four-year compound growth rate of 56%, of which Ethernet switching chips accounted for 64%. Since 2019, the company's business has gradually changed from a period of accumulation to an explosive period, and with the deepening of the company's exchange chip product line, revenue is expected to maintain rapid growth. The company's IPO plans to invest in: 1) upgrade existing switching chip products to break the monopoly of large-capacity switching chips abroad. 2) develop a network chip with the combination of routing and switching, which can be used in boundary routing, optical network and other scenarios to expand the application market horizontally. After the implementation of the fund-raising project, it is expected to enhance the company's overall competitiveness.
Demand: the scale of China's commercial switching chips is 17.1 billion yuan in 2025, and there is broad room for domestic manufacturers to increase their share. Chips account for 69% of the cost of Ethernet switches (Ruijie's online prospectus). Among them, Ethernet switch chip is one of the core components with the lowest localization rate of Ethernet switch.
According to Zuoshi Consulting, the scale of global commercial Ethernet switching chips will be 18.4 billion yuan in 2020, with China accounting for 49%. Driven by demand for cloud computing and AI, 2020-2025e China's commercial Ethernet switch chip CAGR ≈ 14%, far exceeding the global growth rate. According to the application scenario, the switch chip used in the data center has the highest growth rate (18%). The company is developing a series of Arctic products for this market, which is expected to be launched in 2024, with performance against foreign competitors to meet the exuberant downstream demand.
In addition, the enterprise network / operator / industrial scene stock replacement space is broad, the company will continue to extend the product line depth, broaden the product matrix, enhance product competitiveness, in order to meet customer needs.
Supply: Broadcom Ltd / Mei Man / Ruiyu tripod, the company is the first domestic. The barrier to switching chips is extremely high, which is reflected in: high-speed chips involve advanced processes and high capital costs; the product research and development cycle is long and require continuous cash investment; the product life cycle is as long as 8-10 years, and the chip needs close cooperation with the downstream machine. Strong customer stickiness. So there are only a small number of players in the world. In China's commercial switching chip market, foreign manufacturers Broadcom Ltd, Mei Man and Ruiyu have a tripod, with a market share of 62%, 20%, 16%, respectively, in 2020. Shengke Communications ranked fourth, accounting for 1.6%, the first domestic commercial chip.
Growth logic: comply with the trend of self-control and seize the share of foreign big companies. Although the company is already a domestic exchange chip leader, but the market share is only single digits, there is a big gap with the international leader. With the improvement of domestic independent and controllable demand, and the strengthening of the competitiveness of the company's products, the company's market share has more room to improve.
Profit forecast and investment rating: we expect Shengke Telecom's revenue in 2023-2025 to be 100 million yuan in 12-15-18, corresponding to PS in 20-15-13. Cover for the first time, giving a "buy" rating.
Risk hint: product research and development progress is not as expected; supply is insufficient; international situation is uncertain.