Deeply involved in the field of Ethernet switch chips, a leading domestic switching chip company. The company's product matrix continues to expand. The products cover Ethernet switching products from the access layer to the core layer. Self-developed Ethernet switching chips have entered the supply chain of mainstream domestic network equipment vendors such as Xinhua 3, Ruijie Network, and Maipu Technology; the company has a first-mover advantage and market leading position in China, breaking the pattern of long-term monopoly of international giants. Based on the 2020 sales volume, the company ranked first among domestic manufacturers in the Chinese commercial Ethernet switching chip market.

The Ethernet chip business is growing rapidly, and investment in R&D continues to increase. 1) The transformation of core technology has helped increase performance, and the future of the Ethernet chip business can be expected: In the first three quarters of 2023, the company turned losses into profits, mainly due to the continuous increase in customer recognition of the company's chip products and the accumulation of early investment gradually transformed into customer orders, driving the company's continuous revenue growth. The revenue share of the Ethernet switch chip business increased from 27.26% in 2018 to 64.22% in 2022, which is the main driving force for the company's business development; 2) The cost ratio gradually declined during the period and continued to maintain high R&D investment: the company's cost rate fell rapidly from 90.63% in 2018 to 51.17% in 2022, while the cost ratio fell further to 32.73% during the first three quarters of 2023. In addition, the company spent 210 million yuan on R&D in the first three quarters of 2023, an increase of 31.39% over the same period last year (159 million yuan). We believe that as the company's revenue growth rate continues to grow rapidly, the expense ratio continues to decline steadily during the period, which is conducive to the continued rise in the company's overall net interest rate, and is expected to continue to improve the company's profitability.

The competitive landscape of switch chips is oligopolistic, and future growth will mainly come from commercial use. 1) China's Ethernet switching equipment market is in a stage of rapid development. According to Insight Consulting data, the market size is expected to reach 57.42 billion yuan in 2025, and CAGR2020-2025 is 9.6%. The competitive pattern of Ethernet switching chips is oligopolistic. The main increase in market size in the future will come from commercial vendors, and the share of high-speed port products will increase dramatically. According to Insight Consulting data, it is estimated that by 2025, China's 100G and above commercial Ethernet switching chip market will grow dramatically, accounting for 44.2%. 2) Switch chips need to be accumulated over a long period of time to form bonds, and the customer is highly sticky. Mainstream network equipment vendors will choose only one to two sets of Ethernet switching chip solutions, and the application life cycle lasts 8-10 years.

A leading domestic company with scarce switch chips, its products catch up with overseas+localization to replace two-wheel acceleration drives.

1) The company is deeply tied to mainstream network equipment vendors such as Maipu Technology, Xinhua3, and Ruijie Network, and its share is expected to continue to increase. At the same time, the company has mastered the top 11 self-developed core technologies, and the research project is progressing smoothly; 2) Currently, the company's main Ethernet switching chip products cover 100G~2.4Tbps switching capacity and 100M~400G port speed. Compared with overseas leaders such as Broadcom and Marvell, the highest speed products are expected to catch up with overseas and open up the hyperscale data center market. Data centers will become the main driving force for the future growth of China's commercial Ethernet switching chip market. 3) Backed by Chinese electronics, it has multiple localization advantages compared to overseas companies. Currently, it is gradually promoting the localization and replacement of wafer procurement and chip testing services in new products; 4) As a domestic “Little Broadcom”, the company is a domestic leader in the commercial field of Ethernet switching chips. We believe that demand for domestic Ethernet switching chips and switching equipment is expected to continue to increase in the future, benefiting from the national strategic goals of technology powers and supply chain security considerations.

Profit forecast and investment rating: We predict that the company's revenue for 2023-2025 will be 10.5/1,43/1.79 billion yuan, corresponding to PS of 13/10/8 times. As a leading domestic switch chip enterprise, the company is rapidly converting its switching chip technology into revenue, the localization process is accelerating, and we continue to be optimistic about the company's future performance development. The first coverage gave it a “buy” rating.

Risk warning: Risk of gaps between technical standards and industry leaders; risk of developing new products falling short of expectations; risk of high supplier concentration; risk of macroeconomic and industry fluctuations.