The decline in investment income, impairment, and failure to meet expectations of Optical Communications affected 23-year results. The company released its 23-year annual report and quarterly report. The company achieved operating income of 4.35 billion yuan, a year-on-year increase of 3%, net profit due to the previous year of 43.25 million yuan, a year-on-year decrease of 80% of net profit after deduction of non-attributable net income of 6.82 million yuan. The main reasons were: 1) Transferring 80% of Shanghai Junsi Technology's shares in fiscal year 22, and net profit to mother increased by 128 million yuan; 2) Guangtong prepared additional receivables and deductions for Wuhan Guangtong in '23; 3) Optical Communications prepared 45.42 million yuan for deductions from Wuhan Guangtong in '23; 3) Optical Communications prepared 45.42 million yuan for deductions from other accounts receivable The business was affected by industry fluctuations, and the number of orders fell short of expectations. In the first quarter of '24, we achieved operating income of 816 million yuan, a year-on-year decrease of 13%, net profit to mother of 27.32 million yuan, an increase of 13% year-on-year, and net profit after deducting non-return to mother of 21.83 million yuan, an increase of 35% year-on-year.

Increased gross margin of automobile wiring harnesses and power engineering

By business: 1) Optical communication revenue of 823 million yuan, a year-on-year decrease of 18%, a year-on-year decrease of 1.9 pct. The overall market demand for optical cables in 2023 fell short of expectations, and annual production and sales declined year-on-year; 2) Automobile wiring revenue of 1,397 billion yuan, a year-on-year increase of 14 pcts, mainly new projects entering a stable period of mass production and rational allocation of resources. The factory improved production efficiency through various optimization measures, and direct labor costs decreased; 3) Power engineering revenue of 1,487 billion yuan, a year-on-year increase 45%, gross profit margin 20%, up 6 pcts year on year, mainly due to the completion of the 200-300MW power plant project in Khulna, Bangladesh. The completion progress of the current phase of the Bangladesh GTOG project increased significantly; 4) Big data revenue was 95.79 million yuan, up 99% year on year, gross profit margin was 42%, down 9 pct year on year; 5) Revenue from superconducting and copper conductors was 439 million yuan, increasing 14% year on year. The gross profit margin increased by 4 pct year on year, steadily advancing high-temperature sensing superconducting heating and superconductivity in magnetically constrained controlled nuclear fusion as well as It is used in fields such as magnetically drawn monocrystalline and superconducting cables, and has been supplied in batches.

R&D investment in optical chips, superconductivity, data intelligence, etc.

R&D investment was 251 million yuan, compared to 211 million yuan in the same period in '22, and R&D investment accounted for 5.8% of revenue. The company continues to strengthen its layout in new fields: 1) Optical chips: Laying out three market segments: passive wavelength division filter chips, AWG chips, and active laser chips. The company has achieved mass production of 100G DWDM (Dense Wavelength Division Multiplexing) and various types of patch chips, and successfully developed 50G PON Filters.

Laser chips have verified a variety of products and are beginning to accept orders in batches. 2) Superconductivity: Deeply explore the application of the novel nailing center in superconducting films, synthesize organic chemical sources of various elements, and continue the advantages of the IBAD+MOCVD technology route in magnetic flux nailing. 3) In terms of data intelligence, the company will increase R&D investment in intelligent algorithms, industry models, high-performance DPI collection, industrial Internet of Things, and security situation awareness.

Profit forecasting and investment advice

According to the company's annual report and the situation in the first quarter, net profit due to mother for 2024-2026 is estimated to be $121 million, $153 million, and $191 million respectively (the original forecast was $129 million and $155 million for 2024 and 2025 respectively), maintaining the “incremental” rating.

Risk warning: operators' demand for optical cables falls short of expectations, delivery of automobile wiring harnesses falls short of expectations, overseas engineering progress falls short of expectations, market competition exceeds expectations, technology research and development risks, and exchange rate risks.