Incidents:
On April 21, 2024, the company released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 10.718 billion yuan, a year-on-year increase of 11.16%; net profit to mother was 2.174 billion yuan, an increase of 77.58%; net profit after deducting non-return to mother was 2,124 billion yuan, an increase of 104.71% year-on-year.
With 2024Q1, the company achieved operating income of 4.843 billion yuan, an increase of 163.59%; net profit to mother of 1,009 billion yuan, an increase of 303.84% year on year; net profit after deducting non-return to mother was 990 million yuan, an increase of 325.73% year on year.
High-end products improve profit levels
In 2023, thanks to the gradual increase in the proportion of shipments of high-end products such as 800G/400G, continuous optimization of the product structure, and continuous cost reduction and efficiency, the company's product gross margin and net profit margin continued to increase. For the full year of 2023, the company's gross margin reached 32.99%, up 3.68 pcts year on year; net profit margin reached 20.60%, up 7.80 pcts year on year. 2024Q1's gross margin reached 32.76%, up 3.21pct year on year; net margin reached 21.22%, up 7.91 pct year on year.
The third equity incentive highlights confidence in long-term development
On November 24, 2023, the company plans to grant 7.986 million restricted shares to 107 people, including directors, senior management, middle management and core technical (business) executives, of which 7.186 million shares will be granted for the first time. This is the third phase of equity incentives since the company went public. The performance assessment indicators at the company level are that the operating income for 2024-2027 was not less than 147/330/550/80 billion yuan, respectively, or net profit to mother not less than 26.60/56.60/90.50/12.57 billion yuan, respectively. We believe this incentive will help fully motivate key players, enhance team cohesion, and demonstrate confidence in the company's long-term development.
Profit Forecasts, Valuations, and Ratings
Considering the company's growing demand for 800G optical modules, we have raised our 2024 and 2025 performance forecasts. We expect the company's revenue for 2024-2026 to be 236.35/327.63/45.511 billion yuan, respectively, with year-on-year growth rates of 120.52%/38.62%/38.91%, net profit to mother of 45.05/63.04/8.692 billion yuan, respectively, with year-on-year growth rates of 107.24%/39.95%/37.88%, EPS of 5.61/7.85/10.83 yuan/share, and a 3-year CAGR of 58.73%. In view of the continued expansion of the company's high-end products and the increase in profitability, based on comparable company valuations, we gave the company 40 times PE in 2024, with a target price of 224.43 yuan, maintaining a “buy” rating.
Risk warning: Downstream demand falls short of expectations; risk of exchange rate fluctuations; market competition increases risk; trade control between China and the US increases risk.