Description of the event
The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 1.94 billion yuan, +62.0% year over year, and achieved net profit of 730 million yuan, +81.1% year over year; looking at 23Q4, the company achieved revenue of 730 million yuan, +35.2% month-on-month, and achieved net profit of 290 million yuan, +45% month-on-month. The 2023 performance continued to grow month-on-month. In Q1 2024, the company achieved revenue of 730 million yuan, a sharp increase of 155.0% year on year, and remained flat month on month; net profit to mother was 280 million yuan, a sharp increase of 202.7% year on year, down 4.1% month on month.
Incident reviews
Benefiting from the launch of new high-end digital products, passive devices grew steadily in 2023, and active devices exploded rapidly. In 2023, Tianfu's passive devices achieved revenue of 1.18 billion, up 23.3% year on year, while gross margin was 60.3%, up 5.2% year on year. The company's passive products currently have thirteen major product lines, which basically cover all passive optical devices, packaging accessories and optical fiber interface devices required for optical module manufacturing. Benefiting from the explosion in demand for AI high-speed digital optical modules, microlenses, isolators, FA, optical fiber adapters, etc. are in strong demand. The company is an important supplier to leading global optical module manufacturers, and its products have the characteristics of high customization and high process difficulty, maintaining a good gross profit margin. At the same time, overseas optical module manufacturers are constrained by rising production capacity and yield difficulties, which objectively creates demand for optical engine outsourcing. In 2023, the company's active devices generated revenue of 750 million yuan, a sharp increase of 242.5% year on year, and gross margin reached 44.8%, up 8.0% year on year. We saw revenue of $1.04 billion from Fabrinet, the largest customer in 2023, and Fabrinet is Nvidia's optical module ODM partner.
The 24Q1 performance showed a high year-on-year increase and remained basically the same from month to month. In 2023, the production capacity of the company's high-end optical modules supporting passive active products continued to climb. Due to increased mobility of production personnel around the Spring Festival, there was a phased shortage of production capacity, so the first quarter was basically flat. We believe that the company is still very full of orders and is meeting customer demand that may continue to increase month-on-month through continuous expansion of production.
2024Q1, the company's book balances for projects under construction and fixed assets increased by 101% and 8.3%, respectively; in addition, Q1 contract debt was 110 million yuan, which was also a significant increase over 23Q1. Looking ahead to 2024, the company's passive devices, 400G/800G light engines, etc. will continue to benefit from the rapid growth in GPU support demand, and the company maintains a good cooperative relationship with customers through good product performance and delivery capabilities; in addition, the new next-generation 1.6T products for customers have entered a small-batch shipment state, which is expected to be the first to benefit from the 1.6T market launch.
The AI wave is driving the rapid penetration of photonic integration technology such as silicon light, and the company is benefiting from growing demand for customized passive devices and optical engine packaging. In 2023, the global passive device market for various optical modules may exceed 2 billion US dollars. There are many types of passive devices, bringing costs to customer certification integration, and modular integration is a future trend. Tianfu continues to expand its passive product line, and has now formed a complete solution covering various material process platforms such as precision ceramics, engineering plastics, composite metals, optical glass, etc., to expand customers and increase the supporting value of optical modules for individual customers with modular solutions. As an important photonic integration technology, silicon optical modules need to solve the three major process problems of light source coupling, optical fiber coupling, and photoelectric hybrid integration, forming requirements for characteristic supporting products such as polarization-maintaining FA, silicon optical demux, and silicon light engine packaging. At the same time, silicon chip fabless companies require optical engine packaging and testing processes to improve product versatility and yield. The company's ongoing research projects include various FA devices, silicon optical module special optical fiber devices, and single-channel high-power laser products, etc., and will continue to benefit from the professional division of labor trends in the silicon light industry chain.
Representative of lean manufacturing of optical devices, profitability is expected to remain at the leading level in the industry. Tianfu adheres to the ingenuity of “refining everything” and “on-site reality”, and has spent 27.8% of R&D expenses in the past five years. We believe that the company can maintain a high gross margin and net profit margin in the industry: 1) passive devices account for a lower proportion of active materials, a high proportion of manufacturing and labor costs, and there is more room for cost optimization after increasing scale; 2) insisting on high-end products for high-end customers; 3) always providing corresponding products to solve the problems faced by customers in optoelectronic hybrid integrated packaging; 4) lean manufacturing, strong cost control capabilities; 5) Active devices use self-produced passive materials to increase yield and reduce costs.
Investment advice
We expect the company's 2024-2026 net profit to be 13.5/20.0/2.64 billion yuan, and EPS will be 3.41/5.06/6.68, respectively. The P/E corresponding to the closing price on April 30 will be 45.0/30.3/23.0, respectively, maintaining a “buy-A” rating.
Risk warning
1. Shipments such as GPUs fall short of expectations, and there is a risk that the company's active business growth will slow down or decline. The company's active device revenue mainly comes from supporting high-end optical module customers such as Fabrinet. If AI demand falls short of the expected growth rate, there is a risk that it will decline.
2. Risk of declining gross margin. There is a risk that the company's gross margin will decline due to effects such as an increase in the share of active business and the entry of competitors.
3. There is a risk that active new product development falls short of expectations, leading to a decline in client share. Active products are rapidly iterating, and the company's new product support R&D progress or production yield falls short of expectations, which may lead to a decline in share and revenue.