Incident: The company released its quarterly report for 2014. In 24Q1, it achieved revenue of 111 million yuan, -11.32% year over year; net profit to mother of 0.04 billion yuan, -69.36% year over year; net profit after deducting non-return to mother was 0.2 billion yuan, -82.91% year over year.

The performance was in line with expectations. The year-on-year decline in 24Q1 revenue is mainly due to: 1) Major customers in the life sciences sector have declined in demand for optical devices matching the original design due to product upgrades, and the company is still in the development stage for product requirements for new projects; 2) Major customers in the AR/VR inspection field have adjusted their projects, and the new research direction is in the early stages, and demand and delivery of test equipment have declined. Looking at downstream applications, 24Q1 semiconductors, life sciences, biometrics, driverless driving, AR/VR testing, and aerospace revenue accounted for 51.23%, 19.73%, 9.80%, 4.06%, 2.20%, and 1.78%, respectively.

Gross margin declined year on year, and the cost ratio for the period increased year on year. 1) Gross profit margin: In 24Q1, the company's gross margin was 49.48%, -2.19pct year-on-year, and -4.65pct month-on-month. The decline in gross margin is mainly due to increased difficulty in processing products in the semiconductor field, lengthening delivery cycles, and affecting gross profit margins. 2) Period expenses: The 24Q1 company's expenses rate was 43.18%, +7.55pct year-on-year. Among them, sales, management, R&D, and financial expenses rates were 5.52%, 22.29%, 15.80%, and -0.43%, compared with +1.39, +5.41, +2.42, and -1.67pct. The major increase in the company's management expense ratio is mainly due to: a) the company focuses on lean operation management and international management talent team building; introducing senior management talents from home and abroad; b) some assets in the company's fund-raising projects have reached a predetermined state of use, and depreciation expenses have increased; c) the British subsidiary is still in the construction stage, and costs related to preparation have increased.

It has comprehensive optical solution capabilities and actively promotes the global layout. The company has now mastered the full-process optical manufacturing process and five core technologies such as coating, polishing, and gluing. The technical level is leading domestically. The products are mainly used in high value-added fields such as semiconductors, life sciences, and AR/VR testing. At the same time, the company is actively developing a global layout. Not only have production bases, R&D centers and subsidiaries been set up in Thailand, the US, and the UK, but the sales network has also covered countries and regions such as Europe, North America, and the Middle East to support the continuous growth of the enterprise with a perfect operation management system and marketing service system.

Profit forecast: The company's revenue for 24-26 is estimated to be $528, 6.31, and 759 million yuan, respectively, and net profit to mother of 0.56, 0.71, and 89 million yuan, respectively, maintaining the “increase in holdings” rating.

Risk warning: Technology upgrade iterations fall short of expectations, downstream demand falls short of expectations, risk of exchange rate fluctuations.