Core views:

First-quarter results surpassed expectations, and profitability improved significantly. The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 3,098 billion yuan (YoY -6.43%) and net profit to mother of 688 million yuan (YoY -23.82%). With faster product shipments and the company's cost reduction and efficiency, the company's product gross margin and net margin increased to 30.99% and 22.22%. The first quarter achieved revenue of 1,113 billion yuan (YoY +85.41%), and achieved net profit of 325 million yuan (YoY +200.96%). Gross margin and net margin increased to 42% and 29.16% respectively. The main reasons for this were: (1) continuing to optimize cost control capabilities through various methods; (2) the sales share of the company's high-speed products continued to increase.

Inventory has increased dramatically, and production continues to expand, and 800G optical modules will be released quarterly. According to the company's quarterly report, net cash flow from the company's operating activities was -35.17% year-on-year, mainly due to an increase in cash payments during the reporting period; the company's inventory was +56.35% compared to the beginning of the year, mainly due to an increase in the company's inventory preparation in consideration of market demand. We believe that the company's stocking fully highlights strong market demand, which will continue to be fulfilled in the next few quarters. According to the investor relations activity records disclosed by the company, 800G products have been shipped in batches, and shipments are expected to continue to increase in the next few quarters of this year. On the production capacity side, construction of a new plant in Chengdu has been completed, and the second phase of the Thai factory is under construction. In the future, equipment and manpower will continue to be invested to enhance the company's production capacity and product delivery capacity. At the same time, at this year's OFC exhibition, the company successfully launched various new products such as 800G/1.6T optical modules based on single-wave 200G optical devices, and is expected to benefit from the launch of 1.6T optical modules in the future.

Profit forecasting and investment advice. The company is expected to achieve net profit of 15.59 billion, 22.32, and 3.102 billion yuan in 24-26 years. Referring to comparable companies, the company was given a valuation of 40xPE in 2024, corresponding to a reasonable value of 87.83 yuan per share, which covered the “buy” rating for the first time.

Risk warning. Capital expenditure in North America fell short of expectations, development of AI applications fell short of expectations, demand for 800G and 1.6T optical modules fell short of expectations, upstream optical chips were out of stock or price increases, exchange rate fluctuations, and the decline in the price of 800G optical modules exceeded expectations.