Incident: On the evening of October 30, 2023, the company disclosed the 2023 three-quarter report: in the first three quarters of 2023, the company achieved revenue of 219 million yuan, -30.91% year-on-year; net profit of -022 million yuan, -123.57%; net profit after deduction of -67 million yuan, -265.29% year-on-year.

Strategic price adjustments seize the market, and profits are under pressure year over year. In 2023Q3, the company achieved revenue of 77 million yuan, +15.11% year-on-year, net profit of -012 million yuan, -132.86% year-on-year, net profit of -225 million yuan, minus non-net profit of -225 million yuan, -290.40% year-on-year. In terms of profitability, Q3 gross margin and net profit margin improved month-on-month under pressure. The company's gross sales margin in the single quarter was 40.56%, -13.14pct, +4.83pct month-on-month. The year-on-year decline was mainly due to adjustments in the company's price strategy at the beginning of the year and changes in the overall market price of lasers; the company's net sales margin for the single quarter was -15.19%, -68.40pct, +8.20pct month-on-month.

Relying on the optical chip platform, horizontal expansion+vertical expansion into new fields. The company is one of the few companies that develop and mass-produce high-power semiconductor laser chips. Relying on this technological advantage, the company's business has expanded horizontally and vertically into new fields. 1) Continued breakthroughs in high-power semiconductor laser chips: In 23 years, the company has successively increased the commercial mass production power of high-power semiconductor laser chips to the highest level on the market to 50W, 9xxNM fiber laser pump source power to 1000W, and 8xxNm solid-state laser pump source power to 500W. 2) Horizontal expansion: a) In terms of VCSEL chips, downstream applications continue to expand, including consumer electronics, optical communications, in-vehicle lidar, etc., with shipments reaching one million units, mainly 3D sensing, and lidar, which have achieved small-batch shipments; b) In terms of optical communication chips, the company's single-wave 100G EML (56GbD EML is modulated through PAM4) and 50G VCSEL (25G VC is modulated through SELPAM4) is the core device of the current 400G/800G supercomputing data center interconnected optical module, and 100G has achieved mass production. EML already has orders and revenue. 3) Longitudinal extension: extension to downstream devices, modules and direct semiconductor lasers. The company pioneered the launch of a fully autonomous 1710nm direct semiconductor laser in China, which is mainly used for laser penetration welding of transparent/white plastics below 1mm, and has been used in batches on clients.

IDM creates advantages in manufacturing processes, and high growth in VCSELs for lidar can be expected. Using the IDM production model, the company has built mass production lines for 2 inch, 3 inch and 6 inch semiconductor laser chips, built three major material systems of GaAs, InP, and GaN, and established two major platforms for edge emission (EEL) and surface emission (VCSEL), and has successively conquered many technologies such as device design, epitaxial growth, and chip manufacturing. As the core device of 3D sensing and lidar systems, VCSEL chips are currently still mainly used in data communication links and consumer electronics. With the development of AI and the increase in computing power of in-vehicle platforms, lidar is expected to increase its penetration rate, and VCSEL will benefit simultaneously. In terms of automotive electronic lidar, the company mainly promotes main lidar and blind lidar VCSEL chips. Currently, the products have passed AEC-Q102 certification. The main lidar products include low-power chips below 100W, 905nm high-power lidar chips with 100W-1000W and addressable lidar chips. Blind lidar products cover 905-940nm in wavelength and power between 30-60W. The company's multi-junction VCSEL is a key technology for obtaining high power density. It has a US patent, and its performance indicators are at the leading level in the industry.

Investment advice: Considering the macroeconomic impact of the slowdown in macroeconomic growth, we lowered the company's profit forecast: we expect to achieve revenue of 3.15/4.65/726 million yuan in 2023-2025, net profit of 0.19/0.70/195 million yuan, and 580/153/55 times PE with market value on October 31, respectively, maintaining the “buy” rating.

Risk warning: risk of macroeconomic recovery falling short of expectations; risk of increased competition; risk of technological innovation