Incident: The company released its 2024 quarterly report. 24Q1 achieved operating income of 2,387 billion yuan, a year-on-year decrease of 25.29%, realized net profit to mother of 57.92 million yuan, a year-on-year decrease of 75.97%, and realized deduction of 24.42 million yuan in non-net profit, a year-on-year decrease of 89.36%.
Performance declined due to declining demand for fiber optic cables, and gross margin continued to improve. 24Q1's gross sales margin was 26.80%, up 1.35pct from 23Q1 and 6.75pct month-on-month. The company's cost control and product upgrades led to continuous improvement in gross margin. At the beginning of March, China Mobile's official website announced the “2024 to 2025 Centralized Procurement of Special Optical Cable Products List”. The estimated collection scale is 7.2 million core kilometers. Compared with the 8.26 million core kilometers that Mobile launched in 2021, the company ranked first in the 8 pre-selected lists. In terms of period expenses, the 24Q1 company's period rate was 22.8%, an increase of 5.5 pct compared to 23Q1 and an increase of 1.5 pct over 23Q4. It is mainly due to the increase in management expenses and financial expenses due to the acceleration of the company's internationalization and diversified business expansion, as well as an increase in financial expenses due to a decrease in exchange earnings. In the same period, the company's asset impairment losses were 2005 million yuan, a year-on-year increase of 56.8%, and credit impairment losses of 10.25 million yuan, a year-on-year decrease of 56.5%. The company's net operating cash flow reached 104 million yuan in 24Q1, changing from negative to positive. By the end of 24Q1, the company's accounts receivable and notes decreased by 3.0% year on year, accounts receivable decreased by 3.9% year on year, and the company's operating cash control capacity improved.
The company continues to expand new optical communication businesses, and the product structure continues to be optimized and upgraded. In the traditional optical communication sector, on the one hand, the company increases the gross profit margin of the original product structure by improving efficiency and reducing costs, and on the other hand, opens up new markets through new technology development and product structure upgrades, and maintains a leading position in the industry. At the OFC exhibition in March, the company released a number of papers on air division multiplexing and air core optical fiber technology. Air division multiplexing and air core fiber are the two main technical routes required for next-generation optical transmission. Changfei maintains a leading position in related technology fields. In addition, the company showcased 800G AEC/AOC series of products in the field of high-speed connectivity at the exhibition. In 2023, the company achieved overseas revenue of 4.34 billion yuan, accounting for 32.5%. In the optical cable sector, the company further opened up optical cable sales channels in overseas markets. According to CRU forecasts, global optical cable demand will resume growth, and the total volume is expected to reach 550 million core kilometers, and maintain the growth trend in 2024-2028. In April 2024, the acquisition of RFS Germany and RFS Suzhou was completed. The company's products are mainly used in rail transit, base station RF cables, etc. In the new optical communication business segment, Bochuang Technology, a subsidiary of the company, completed integration with Changxinsheng in 2023. Through the acquisition of Changxinsheng, Bochuang Technology can use Changxinsheng's mature technology and team to quickly enter the consumer active optical cable field. In addition, the subsidiary Changfei Baosheng Offshore Engineering currently has construction service capabilities. In 2024, the company will further improve its submarine cable installation and fan installation capabilities. The ocean breeze field is another important direction for the company to expand beyond optical communication.
Investment advice: We expect the company to achieve operating income of 149.40/165.32/18.261 billion yuan in 2024/2025/2026, and net profit of 13.72/15.55/ 1,745 billion yuan during the same period, corresponding to 16/14/13 times PE, maintaining the “recommended” rating.
Risk warning: Demand from operators to purchase optical fiber cables has dropped sharply; the 24-year product structure upgrade fell short of expectations.