Incident: The company released its 2023 annual report and 2024 quarterly report on the evening of April 25. In 2023, the company achieved revenue of 144 million yuan, a year-on-year decrease of 48.96%; gross profit margin of 41.88%, a year-on-year decrease of 20.02pct; realized net profit to the mother of 19 million yuan, a year-on-year decrease of 80.58%; realized net profit without return to mother of -2387 million yuan, a year-on-year decrease of 100.26%.

Comment: Revenue picked up rapidly in the first quarter of 2024, and the rapid increase in AI computing power demand and related capital expenses is expected to usher in significant growth in demand for digital communication side optical chips. On a quarterly basis, in the first quarter of 2024, the company achieved revenue of 60 million yuan, a year-on-year increase of 72.33%; a gross profit margin of 34.84%, a year-on-year decrease of 7.91 pct; realized net profit of 111 million yuan, a year-on-year decrease of 11.06%; and realized net profit without return to mother of 96 million yuan, an increase of 109.72% year on year.

The company's telecom market business declined in 2023 due to downstream customer demand, and EML, ONU and OLT optical chip products continued to be upgraded and expanded. In 2023, the company's telecom market business achieved revenue of 133 million yuan, a year-on-year decrease of 43.83%, gross profit margin of 38.87%, a year-on-year decrease of 20.64pct, mainly due to the decline in the telecom market due to the slowdown in downstream customer inventories and terminal operators' construction pace, as well as increased price competition for some products in the domestic market. The company actively responded to market pressure. Through the expansion of key customers and key products such as 10G EML, the telecom market business revenue showed a month-on-month improvement trend starting in the fourth quarter of 2023. During the reporting period, the company developed and tested differentiated 10G DFB products in the field of optical fiber access to customers, and continued to optimize 10G EML.

The company's digital communication market business declined in a phased manner in 2023 due to downstream customer demand, and actively deployed products in key areas such as 100G EML and CW silicon lasers. In 2023, the company's digital communication market business achieved revenue of 4.713,800 yuan, a year-on-year decrease of 89.47%, mainly due to the phased decline in demand in the traditional cloud computing field. The company actively grasped AI demand opportunities for 400G/800G high-speed optical modules in the digital communication market and sent 100G PAM4 EML and CW light source products to many domestic and foreign customers. Currently, related tests are progressing smoothly. The company has completed product development and design for high-power CW chips in the field of silicon optics; 200G PAM4 EML has completed performance development and in-factory testing.

Profit forecast and investment advice: Yuanjie Technology is a leading domestic optical chip manufacturer. We are optimistic that the company will benefit from the boom in downstream demand and the rapid release of new products in the field of optical fiber access and data centers. The company is expected to have revenue of 2.85/4.51/617 billion yuan in 2024-2026 and net profit of 0.63/1.23/181 million yuan, corresponding to EPS of 0.74/1.44/2.12 yuan/share, maintaining an “increase in holdings” rating.

Risk warning: Downstream demand falls short of expectations, market competition intensifies, and new product releases fall short of expectations.