Incident: The company's annual report data: In '23, it achieved operating income of 3,098 billion yuan, a decrease of 6.43%; net profit to mother was 688 million yuan, a decrease of 23.82%. Quarterly report data: In Q1 '24, revenue was 1,113 billion yuan, up 85.41%, up 10.12%; net profit to mother was 325 million yuan, up 200.96%, and 25.40%.
The share of 400G increased significantly throughout the year, and the product structure was greatly improved: the traditional optical communication market was relatively sluggish, and the incremental demand brought about by AI was not effectively reflected in the company's performance, leading to a decline in revenue and profit.
However, changes in the product structure led to an increase in the ASP module from 428 yuan to 503 yuan. The company's module sales decreased from 7.59 million to 6.03 million, but we judge that 400G sales have increased significantly. Benefiting from AI, the largest customer's sales increased from 980 million yuan to 1.14 billion yuan. Assuming that the price of 400G optical modules falls by 15% per year, the company's 400G product shipments are expected to increase by more than 30%.
There is a marked upward trend in quarterly gross margin: although gross margin for the full year of '23 fell 5.7pct year on year, the quarterly upward trend was remarkable. The gross margin for 23Q4 was 36.77%, with a decrease of 3.75pct and an increase of 10.61pct; the gross profit margin for Q1 in '24 was 42%, with a 7.96pct increase of 5.24pct. We determine that the main reason may be:
1) The company's technological innovation promotes the development of optical modules in the direction of smaller packages, lower power consumption, and lower costs; 2) The company reduces shipments of low-margin products and optimizes its business structure. We believe there is still room for improvement in profitability with higher speed mass shipments such as 800G.
Expenses are properly managed, 24Q1 revenue rapidly expanded, and the cost rate was reduced year on year: the cost rate was reduced by 1.54 pct year on year during the full year of '23, and the sales/management/ R&D/finance expenses ratio decreased by 0.37/0.09/1.34/ -0.27 pct year on year, respectively. The cost ratio was reduced by 4.47 pct year-on-year during the 24Q1 period, and the sales/management/R&D/finance expense ratio decreased by -0.58/0.33/0.48/4.24pct, respectively. Although the absolute value of expenses changed greatly due to the increase in Q1 remuneration, the rapid start of revenue led to a reduction in the cost ratio. The large change in financial expenses was mainly due to an increase in interest income.
Inventory turnover is expected to accelerate, as product increases confirm the increase in production capacity: the company's inventory at the end of 22/the end of 23/the end of the first quarter of '24 was 1.47 billion, 963 million/1,506 million, respectively. Compared with the book value in '22/23, raw materials decreased from 490 million to 280 million, or indicate an acceleration in raw material turnover; the product increased significantly from 234 million to 304 million, which confirms the increase in customer demand and the company's production capacity; the number of products issued dropped significantly from 353 million to 161 million yuan, which we expect to accelerate customer delivery.
Profit forecast: In the context of the rapid development of the AI+ cloud computing data center market, the company's customer and product structure are continuously optimized, and LPO+1.6T is a long-term growth point. We believe that AI is expected to drive demand growth for 800G optical modules in the medium to long term. We adjusted net profit to mother of 16.10/26.49/35.39 billion yuan for 24-26 (previously predicted net profit of 1.46/2.03 billion yuan for 24-25), and corresponding PE was 38X/23X/17X, respectively, maintaining a “buy” rating.
Risk warning: downstream demand falls short of expectations; the impact of the global pandemic exceeds expectations; market competition risk; product development risk; the estimates in the article are subjective and are for reference only.