Incident: Huagong Technology released its 2024 quarterly report. The company's Q1 achieved revenue of 2.170 billion yuan (YoY -18.56%, -27.68%), net profit of 290 million yuan (-5.92% YoY, +48.58%), net profit excluding non-return to mother 226 million yuan (-18.28% YoY, +203.73% month-on-month), gross profit margin 24.83% (YoY +3.56pct), net profit margin of 13.36% (YoY +1.80pct), month-on-month 6.86pct).

Operations are under pressure in the short term, and the cost ratio has risen. The 24Q1 company's sales, management, R&D, and financial expense ratios were 5.70%, 3.54%, 6.43%, and -1.39%, respectively. The year-on-year ratio was +1.15pct, +0.90pct, +1.62pct, and -0.75pct, respectively. Apart from the improvement in the financial expense ratio, the three sales management and research rates all increased due to the decline in revenue.

Excluding investment income, profit continued to grow by double digits year over year. The 24Q1 company's investment income in joint ventures was 1910,000 yuan, and 23Q1 was 58.7 million yuan. Excluding this portion of investment income, 24Q1's operating profit was about 292 million yuan, or 249 million yuan for the same period last year, +17.00% over the same period last year

Profit forecast: We expect the company's revenue for 2024-2026 to be RMB 11.980 billion, RMB 13.651 billion, RMB 15.162 billion, and net profit to mother of RMB 1,310 billion, RMB 1,567 billion, RMB 1,861 billion, and EPS of RMB 1.30, RMB 1.56 and RMB 1.85 billion respectively. Referring to the company's historical valuation and the average valuation level of comparable companies, the company was given a 2024 dynamic PE range of 30-35X, corresponding to a reasonable value range of 39.10-45.61 yuan, which is “superior to the market” rating.

Risk warning: 800G optical module sample delivery results fell short of expectations, and market competition intensified.