Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 3,098 billion yuan, a decrease of 6.43%, and realized net profit of 688 million yuan, a decrease of 23.82%; 1Q24 achieved revenue of 1,113 billion yuan, an increase of 85.41%, and realized net profit to mother of 325 million yuan, an increase of 200.96%.
Profitability began to increase rapidly in 4Q23, and 1Q24 performance exceeded expectations: in terms of performance, the company achieved a gross profit margin of 30.99% in 2023, a decrease of 5.67 pcts, a net profit margin of 22.22%, and a decrease of 5.07pcts.
On a quarterly basis, although the company's relevant performance data for the full year of 2023 declined, driven by 400G and 800G high-margin products, the company's operating income, net profit to mother, and sales margin in the fourth quarter of 2023 all showed a high upward trend, and this trend continued until 1Q24. We believe that this trend is due to the increase in demand spawned by artificial intelligence in 2023Q4, and the company's performance side verifies the high prosperity of the industry. We expect that as the introduction process of 800G high-margin products continues to accelerate, the company, as an industry-leading enterprise, the performance side is expected to maintain a relatively high profit margin during the rapid development and iteration of AI, continuing the good growth trend that began in the fourth quarter of 2023.
Artificial intelligence drives the rapid development of the industry, and the company's strong R&D strength is expected to achieve a high increase in revenue: with the release of GPT applications such as ChatGPT, Wenxin Yiyan, and Tongyi Qianwen, etc., the training and inference applications of AI models require massive parallel data calculation, which places greater demand on the network bandwidth of AI data centers. The development of AI data centers will accelerate the development and application of high-speed optical modules, which complement each other and promote each other. According to Dell'Oro data, 20% of Ethernet data center switch ports will be used to connect accelerated servers that support artificial intelligence tasks by 2027. The rise of new generative artificial intelligence applications will help drive further growth in the data center switching market, which is expected to generate over $100 billion in cumulative sales over the next five years. In the “14th Five-Year Plan and Outline of the Long-term Goals for 2035” and the 2021 State Council's “Report on the Work of the Government”, China clearly proposed “system layout of new infrastructure to accelerate the construction of fifth-generation mobile communications, industrial Internet, big data centers, etc.” 5G, as a global communication technology standard, has become an important driving force for the transformation and upgrading of the national economy, and has made clear arrangements for the development of 5G in plans such as network power, manufacturing power, and information technology development strategies. 5G has become a national strategic high point. It is expected that the demand side will be influenced by AI The company is expected to achieve a high increase in performance due to representative digital communication side driving and telecom side promotion of 400G backbone network construction.
Investment advice: We believe that as the development of AI boosts the demand side, the company, as an industry leader, is expected to continue to benefit from the high growth of the industry. We predict that in 2024/2025/2026, the company will achieve revenue of 56.83/81.96/11.453 billion yuan, an increase of 83.47%/44.21%/39.75%; EPS is 1.99/2.83/3.76 yuan respectively, corresponding to 2024/2025/2026 PE is 43.77/30.84/23.22 times, respectively. Considering the company's leading position in the digital communication business and core competitiveness of technology, the company will maintain a “recommended” rating for the company.
Risk warning: Risk of AI development falling short of expectations, risk of introducing new products falling short of expectations, risk of R&D progress falling short of expectations, risk of increased industry competition, etc.