Description of the event
The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 3.10 billion yuan, -6.4% year-on-year, and realized net profit of 690 million yuan, or -23.8% year-on-year. Looking at 23Q4, the company achieved revenue of 1.01 billion yuan, +12.8% year-on-month, +29.5% month-on-month; realized net profit of 260 million yuan, +83.4% year-on-year, and +85.7% month-on-month. In the first quarter of 2024, the company achieved revenue of 1.11 billion yuan, +85.4% year over month, and realized net profit of 330 million yuan to mother, +201.0% year on year, and +26.9% month on month.
Incident reviews
Benefiting from the increase in key customers in North America, 23Q4 performance grew rapidly month-on-month. In 2023, the company's performance showed the characteristics of low and high levels. Q4 growth was significant, mainly due to the pace of demand from major downstream customers.
According to our capital expenditure statistics for Amazon, Google, Meta, and Microsoft, the total for 24Q4 was 41.8 billion US dollars, up 8.9% and 16.6%, respectively. The release of Nvidia's GPU production capacity clearly boosted AI investment by major downstream customers. Benefiting from the increase in optical module purchases from major customers and the increase in the share of high-speed products, the company achieved significant month-on-month increases in revenue and gross margin in 23Q4. Looking at the full year, although gross margin fell 5.7% from 2022, the decline in net sales margin narrowed to 1.8% after deduction, mainly due to higher investment returns in the same period in 2022.
24Q1 continued to grow month-on-month, with net profit and gross margin not attributable to mother reaching record highs. In 24Q1, major North American customers maintained strong investment strength. The company's revenue, net profit after deduction of non-return to mother, and gross margin all reached record highs. The increase in profitability is due, on the one hand, to the increase in the share of high-speed product sales, and on the other hand, from the company's ability to continuously optimize cost control. At the end of Q1, the company's inventory was 1.51 billion yuan, a sharp increase of 56.4% over the previous month, reflecting strong downstream demand, and the company actively stocked raw materials. Looking ahead to 2024, we believe that the company's revenue is expected to maintain a month-on-month growth trend. First, capital expenses for major downstream customers will increase, second, the share of higher-speed products such as 800G will increase, and third, open a window for new customers to enter through new models of new products (such as 800G LPO).
As major North American cloud manufacturers develop their own chips and supporting networks, future customers for AI optical modules will be more diversified, and the company faces better market opportunities. Currently, Nvidia is still in an absolute leading position in the AI cluster network, but as the proportion of AI chips developed in-house by Yunda Factory increases, it is expected to generate demand for new materials from new customers of high-end optical modules. Currently, Amazon, Google, Microsoft, and Meta have respectively announced Trainium2, TPUv5p, Maia100, and MTIA, which can be used for AI training, and 800GSR8&DR8&2*FR4 are expected to be the main supporting optical modules. LightCounting believes that in 2024 and 2025, the global demand for AI cluster optical modules is close to 10 million and 19 million, respectively, of which Nvidia accounts for more than half. By 2029, Nvidia's share of shipments will drop to 24%, mainly being replaced by Yunda's own production. Yundachang's AI network construction uses the ROCE technology route, which generally requires high requirements for optical module delivery capacity and cost control. Xinyisheng has established good cooperative relationships with mainstream overseas equipment vendors and Internet vendors. It has been fully tested by the ability to deliver orders from major customers during the “online economy” outbreak, and is expected to continue to benefit from stable partnerships in the AI era. The company has completed the construction of a new plant in Chengdu, and the second phase of the Thai factory is also under construction to prepare for a rapid increase in production capacity.
A model for lean manufacturing of optical modules, the profitability is at the leading level in the industry. Xinyisheng's gross margin is at the leading level in the optical module industry. We think it is mainly influenced by the following factors. 1) The strategy focuses on high-rate products from major overseas customers; 2) Mainly produces high-rate products in the southwest region; 3) Maintaining long-term strategic partnerships with Broadcom, a core supplier such as DSP and VCSEL, and may have advantages in procurement costs; 4) Excellent supply chain and inventory management levels; 5) Management is hands-on, adhering to lean manufacturing, and the sales and management cost control effect is remarkable.
Investment advice
We expect the company's 2024-2026 revenue to be 5.84 billion yuan, 8.33 billion yuan and 10.66 billion yuan, respectively, and net profit to mother of 1.62 billion yuan, 2.20 billion yuan, and 2.92 billion, respectively. The P/E corresponding to the closing price on May 7 is 36.6/26.9/20.2, respectively, maintaining the “buy-B” rating.
Risk warning
1. Demand for optical modules from key customers in North America falls short of the expected risk. The company's top five customers accounted for 60.7% of the first five customers in 2023, mainly high-end optical modules from major North American customers. If demand falls, it will have a significant adverse impact on revenue.
2. Risk of declining gross margin. If the price of new orders falls too fast or the cost of raw materials rises above expectations, there is a risk that the company's profitability will decline.
3. New customer expansion falls short of the expected risk. The company is currently shipping in small batches to many new customers, and there will be uncertainty if the expansion falls short of the expected medium- to long-term growth capacity.