In the first three quarters of 2023, the company's revenue reached 10.029 billion yuan, -2.08% year-on-year; net profit was 881 million yuan, +0.59% year-on-year; and gross margin reached 25.98%, +2.77pcts year-on-year. The company's performance was under pressure in the short term, mainly due to the slowdown in domestic and foreign fiber optic cable demand. However, we believe that as the backbone network evolves from 100G to 400G in the future, it is expected to drive demand for the new product G.654E, thereby driving the industry's prosperity upward. As a global leader in fiber-optic cables, the company is expected to benefit fully. At the same time, the company's “reinvent a long flight” strategy is progressing smoothly, and diversified business is also expected to provide the company with long-term growth impetus. Therefore, we gave the company a target price of $34 for A shares and HK$16 for Hong Kong stocks, maintaining a “buy” rating.

The company's performance is under pressure, affected by the decline in domestic and foreign industry prosperity. In the first three quarters, the company's revenue reached 10.029 billion yuan, -2.08% year-on-year; net profit was 881 million yuan, +0.59% year-on-year; and gross margin was 25.98%, +2.77pcts year-on-year. Q3 Single quarter revenue was 3.114 billion yuan, -19.14% year over year, -16.29% month on month; net profit was 274 million yuan, -21.84% year on year, -25.25% month on month; gross margin was 25.72%, +1.27 pcts year on year, -0.93pct month on month. The company's performance in the first three quarters was under pressure, mainly due to a short-term slowdown in domestic and foreign fiber optic cable demand.

The company has a leading position in the industry and is waiting for G.654E to promote the recovery of industry prosperity. As a global leader in fiber optic cables, the company has repeatedly topped the market share in domestic operator procurement over the years. According to the China Mobile Procurement Network, it once again won the first place in the bid for China Mobile's ordinary optical cable products from 2023 to 2024 (19.36% share). Furthermore, the company has a leading layout in the new product G.654E, and also won first place in China Mobile's G.654E fiber optic cable collection from 2022 to 2023 (40% share). In March 2023, China Mobile completed the verification of the first ultra-long-range prototype of the 400G QPSK offline system based on G.654E, laying the foundation for the construction of a 400G backbone network. On October 31, 2023, China Mobile Communications also announced centralized procurement of equipment for 400G OTN new technology test networks for inter-provincial backbone transmission networks. We believe that at present, the evolution of the backbone network from 100G to 400G has gradually begun, and demand for G.654E products is expected to be fully driven, driving the recovery of industry prosperity. The company is one of the few domestic enterprises that can supply G.654E in large quantities. At the same time, it has a leading collection share, so it is expected to fully enjoy the benefits of the industry.

Optical modules+third-generation semiconductors+fiber laser+marine engineering, the “reinvent a long flight” strategy is progressing smoothly.

During the reporting period, the company actively expanded innovative businesses such as optical modules, third-generation semiconductors, marine engineering business, and fiber lasers. After acquiring Bochuang Technology, the company actively promoted business collaboration between Bochuang Technology and its subsidiary Sichuan Guangheng. In the future, it is expected that the comprehensive layout of Changfei Optical Fiber in the field of optical communication will be further improved, enhancing the company's overall competitive strength and position in the industry. Furthermore, with years of deep experience in optical communication and other fields, the company's business in third-generation semiconductors, marine engineering, and fiber lasers is progressing smoothly. Under the corporate strategy of “reinventing a long flight”, the diversified business layout is expected to provide the company with long-term growth impetus.

With the sale of Yunhui Optoelectronics shares, the company is expected to receive an investment income of 440 million yuan. According to the company's announcement on the evening of November 1, the company will sell 11.2% of Yunhui Optoelectronics's shares to Lumentum. The deal has been unanimously approved by the boards of directors of Lumentum and Yunhui Optoelectronics and the shareholders of Yunhui Technology. The transaction is expected to close by the end of 2023. According to the consideration for this sale of USD 750 million, if the sale is completed according to plan, the company expects the company to generate an investment income of about RMB 440 million.

Risk factors: The recovery in the prosperity of the fiber optic cable industry fell short of expectations; the company's innovative business development progress fell short of expectations; the company's business integration fell short of expectations; overseas demand fell short of expectations; and Yunhui Optoelectronics's sales progress fell short of expectations.

Profit forecasting, valuation and ratings: The industry's short-term internal sentiment has declined, but we believe that as the global backbone network evolves from 100G to 400G, it will significantly boost the recovery of industry prosperity. At the same time, the company is actively expanding diversified businesses, which is expected to provide the company with an impetus for long-term growth. At the same time, taking into account the decline in industry sentiment in the short term and the investment income that may be brought from the sale of shares, we adjusted the company's net profit forecast for 2023/2024 to 16.34/1,394 billion yuan (the original forecast value was 1,423/1,710 billion yuan), and added the 2025 profit forecast to 1,649 billion yuan. Referring to comparable companies (Hengtong Optoelectronics, Fenghuo Communications Wind's agreed average valuation is 20x PE in 2024), we gave A shares 18 times PE in 2024, corresponding to the target price of 34 yuan, and 8 times PE for the company's Hong Kong stock in 2024 (based on considerations of the liquidity of Hong Kong stocks and the difference between the company's A/H historical stock price, given a certain discount), corresponding to the target price of HK$16 under the current exchange rate, maintaining a “buy” rating.