Incident: Firefight Communications released its 2023 annual report. The company achieved annual revenue of 31.130 billion yuan (+0.68% year over year after adjustment), net profit of 505 million yuan (+24.39% according to adjusted caliber), net profit of 455 million yuan (+28.51% year on year according to adjusted caliber), gross margin of 20.56% (YoY -1.41pct), net operating cash flow of 59.17 million yuan (YoY +25.79%), ROE For 4.06% (+0.68pct year over year) Looking at a single quarter, 23Q4 achieved revenue of 8.570 billion yuan (-8.73% YoY), net profit to mother of 178 million yuan (+70.44% YoY), and net profit of not attributable to mother of 159 million yuan (+97.65% YoY).

The revenue scale remained essentially the same. By product: Communications systems equipment revenue was 23.785 billion yuan (YoY +13.72%), gross margin was 19.24% (YoY -1.22pct); optical fiber and cable revenue was 5.387 billion yuan (YoY -17.24%), gross margin was 21.24% (YoY +3.81pct); data network product revenue was 1,577 billion yuan (YoY -49.63%), gross margin was 41.35% (YoY -0.26pct). By region:

Domestic business revenue was 20.930 billion yuan (YoY +9.36%), gross margin was 17.23% (YoY -2.49pct); foreign business revenue was 9.818 billion yuan (YoY -13.99%), gross margin was 28.19% (YoY +2.41 pct).

By business: 1) Optical communication business: Optical transmission won the bid for the mobile 400G project, achieving the layout of the next generation backbone network in the operator market; optical access broke through 50G PON high-capacity, high-density, three-mode coexistence technology to complete pilot applications in operators' current networks; fiber optic cable products further increased their market share in the operator market, and the marine communications business achieved breakthroughs in the international market, forming large-scale sales. 2) Information technology business:

Second curve business computing power products have maintained rapid growth, leading the market share in server collection in the operator market, and continued to break through in the financial field, achieving large-scale applications for key customers such as ICBC and CCB; data center switches won bids for mobile and telecom collection, achieving a breakthrough layout for data communication products.

Expense control is targeted, and the R&D cost rate has dropped significantly. The company's sales, management, and R&D expenses in '23 were 5.74%, 1.10%, and 11.49%, respectively. The year-on-year decline was significant, mainly due to the company optimizing the R&D project structure, focusing on key R&D areas, and moderately shrinking the scope of R&D business.

Status of key subsidiaries: Fenghuo Space's net profit in 1994 was 23 million yuan (10.8277 million yuan in '22, +84.25% year-on-year), and Fenghuo Ultra's net profit was 2.3867 million yuan (-33.32 million yuan in '22, turning a year-on-year loss into a profit).

Profit forecast and investment advice: We expect the company's net profit to be RMB 732 million, RMB 903 million, RMB 1,033 million for 24-26, and EPS of RMB 0.62, RMB 0.76 and RMB 0.87, 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 35-40X, corresponding to a reasonable value range of 21.62 to 24.71 yuan, which is “superior to the market” rating.

Risk warning: Overseas fiber optic cable construction falls short of expectations; network visualization and AI industry demand falls short of expectations.