Incident: The company released its 2024 quarterly report, with operating revenue of 732 million yuan, +154.95%, and -0.11% month-on-month; net profit to mother reached 279 million yuan, +202.68%, or -4.10% month-on-month.
Q1 month-on-month growth was limited by short-term production capacity: the company's Q1 performance was high year-on-year but declined slightly month-on-month. The reasons are: 1) Demand from downstream customers is still strong, but there is still a gap on the supply side due to company personnel changes in the first quarter, and the proficiency and efficiency of new employees need to be improved; 2) In the upper phase of AI optical modules, customers have high product performance requirements, and it still takes time and experience to climb the yield of high-speed products; 3) There was a temporary shortage of raw materials in the first quarter, but it has now been mitigated. We believe the pressure on the company's production capacity is expected to gradually ease as the Q2 company's manpower conflict has been resolved and the Thai factory is about to begin sample delivery in late May.
Improved yield is expected to drive a continuous increase in gross margin: the company's 24Q1 gross profit margin was 55.51%, up 4.09pct, and the year-on-year profitability increase was mainly due to: 1) customer product rate development to the high-end; 2) cost reduction and efficiency of the Jiangxi production base. We estimate the reason for the month-on-month decline: 1) There is a big difference in the cost structure of active products and the light and passive period. As the share of active products with relatively low gross profit increases, the overall gross margin may decline to a certain extent compared to 23Q4; 2) Active products may experience a normal annual decline in price. We judge that future increases in product yield are expected to lead to a continued increase in profitability.
The cost rate increased slightly from month to month, and the cost rate is expected to shrink after the revenue scale is expanded: the cost rate decreased by 3.91 pct during the 24Q1 period, and the rapid expansion of the revenue scale is expected to lead to continued dilution of the cost rate. The cost ratio of 24Q1 was +1.01 pct compared to the 23Q4 period, and the sales/management/R&D expense ratios were +0.74/+1.08/+1.89pct month-on-month, respectively. The main reason was a significant increase in expenses due to equity incentives and salary increases. The financial expense ratio was 2.70 pct, mainly due to the impact of exchange earnings.
Delivery accelerated, and prepaid equipment payments & contract liabilities increased significantly: the company's inventory 23 was 1.78/2.56/234 million yuan at the end of the first quarter/ end of the first quarter of '24, respectively. We estimate that inventory reduction at the end of the quarter or inventory consumption due to accelerated delivery, inventory structure optimization; prepaid accounts 23 were 500/388/11.8 million yuan at the end of the first quarter/ end of '23/the end of the first quarter of '24, respectively. The increase in equipment payments may confirm that the company's orders are sufficient and there is sufficient confidence to expand production; contract liabilities for the end of the first quarter/ end of '23/'24, respectively. At the end of the season, they are At $0.33/0.84 billion, customer payments in advance increased significantly.
Fully tied to Fabrinet, major customers accounted for more than half: domestic revenue decreased by 31.8% in '23, overseas grew by 131.3%, and the share of export sales increased from 57.6% in 2022 to 82.1% in 2023. Among them, Fabrin et, the largest customer, had revenue of 1.04 billion yuan, accounting for 53.6%. In addition to active product revenue of about 700 million dollars, the company's revenue from supplying MPO and FA supporting passive devices to Fabrinet is estimated to exceed 300 million. The future passive+active business will fully benefit from overseas AI construction.
Investment advice: The company is located in the upstream of optical modules, fully benefiting from the boom in the global digital communication market. Combined with the continuous expansion of the company's product line and mass production of key optical engine products, the future growth momentum is full. We forecast that the company's net profit for 24-26 will be 1,535/24.51/3.391 billion yuan, corresponding to a PE of 42X/26X/19X in 24-26, maintaining an “incremental” rating.
Risk warning: downstream customer demand falls short of expectations, progress of new 1.6T light engine products falls short of expectations, production capacity expansion falls short of expectations, etc.