The 2023 results are in line with our expectations. The 1Q24 results are lower than our expectations. Guangxun Technology announced the 2023 annual report and 2024 quarterly report results: In 2023, the company achieved operating income of 6.061 billion yuan, a year-on-year decrease of 12%, net profit to the mother of 619 million yuan, a year-on-year increase of 2%, after deducting non-net profit of 565 million yuan, an increase of 3% year on year; corresponding to the 4Q23 single quarter, the company's revenue was 1,734 million yuan, up 76% year on year. The increase was 17% month-on-month, and the performance continued to improve month-on-month. We judge that the 2023 results are in line with our expectations, mainly due to the gradual recovery in demand such as downstream digital communication.
In the 1Q24 quarter, the company achieved operating income of 1,291 billion yuan, an increase of 2% year on year; net profit to mother was 77 million yuan, down 24% year on year; deducted non-net profit was 73 million yuan, down 5% year on year. We believe that in a situation where demand for downstream digital communication is strong, only a slight increase on the revenue side affects delivery; the decline on the profit side is mainly due to the increase in expenses due to equity incentives and amortization costs and increased investment in equipment and personnel. The total cost rate for 1Q24 sales, management, and R&D was 17.8%, up 5.8ppt month-on-month, and 1Q24 performance fell short of our expectations.
Financial concerns: 1) Gross profit margin: 1Q24 gross margin was 22.5%, up 0.5ppt year over year. We judge that the share of the data center business increased, down 2.2ppt from month to month. We believe that investment in the new industrial park will affect profit levels in the short term. As upstream material supply issues gradually ease and production capacity is gradually put into place after the new industrial park is relocated and put into operation, we expect the company's profitability to be repaired and achieve a month-on-month increase in performance. 2) Inventory: At the end of 1Q24, the book value of inventory rose from 1,886 billion yuan at the end of 2023 to 2,419 billion yuan. We judge that the structural changes were the same as in 2023, mainly driven by product growth, reflecting strong demand for downstream orders and relatively tight supply of upstream raw materials.
Development trends
Strong demand for digital communication orders has become the main driving force for growth. In 2023, due to major customer inventory removal, the company's data and access business declined 17.01% year-on-year to 2,664 billion yuan. As AI demand continues to evolve, we see that the vigorous development of domestic intelligent computing center construction is gradually driving domestic demand for 400G+ high-speed optical modules. As one of the domestic core suppliers, the company is expected to benefit from the expansion of the industry space. On the product side, the annual report shows that the company's optical module product rate covers 10G-1.6T. At the OFC 2024 conference, the company demonstrated new technology solutions such as 800G LPO/TRO and 1.6T silicon optical modules (jointly launched by Cisco); in terms of chip self-development, according to the company's announcement, the company's self-developed high-speed optical chips have been partially released and delivered. We believe that although the company has not developed a first-mover advantage in the overseas digital communication market, the company's overseas business may have potential for growth under measures such as actively promoting product iteration and innovation and increasing market development efforts.
Profit forecasting and valuation
Maintain the 2024 profit forecast and introduce 2025 net profit of 926 million yuan. The current stock price corresponds to 37.8/32.3 times the price-earnings ratio for 2024/25. Maintaining an outperforming industry rating, considering that AI transformation is driving industry demand to continue to rise, the company's performance in 2025 is expected to be further boosted, and the industry's valuation center is moving upward. We switched to 37 times P/E in 2025 and raised the target price by 43% to 43 yuan, corresponding to 14.1% upward space.
risks
Demand for transmission, access and digital optical modules fell short of expectations; overseas market expansion fell short of expectations.