Core views

The short-term pressure on the company's performance in 2023 is mainly due to the fact that most high-speed optical module products are in the customer-side sample delivery verification stage and have not been shipped in batches. Furthermore, demand in the traditional optical module market is sluggish, and the company's performance has been affected. As the company continues to make breakthroughs on the customer side, shipments of high-speed optical module products such as 400G have increased dramatically, yield and capacity utilization have increased, cost reduction and efficiency have accelerated, and 24Q1's profit quality has improved markedly. As the company continues to make breakthroughs in the supply chains of major overseas customers, 800G and 1.6T are expected to achieve batch shipments, achieve rapid revenue growth, and further increase their contribution to performance.

occurrences

Recently, the company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 3,098 billion yuan, a year-on-year decrease of 6.43%; realized net profit of 688 million yuan, a year-on-year decrease of 23.82%; and realized net profit deducted from non-mother of 678 million yuan, a year-on-year decrease of 13.54%. With 2024Q1, the company achieved operating income of 1,113 billion yuan, an increase of 85.41% year on year; realized net profit of 325 million yuan, an increase of 200.96% year on year; realized net profit without deduction of 325 million yuan, an increase of 206.69% year on year.

Brief review

1. Performance in 2023 is under pressure, 2024Q1 high-speed products are shipped in batches, and performance is released.

In 2023, the company achieved operating income of 3,098 billion yuan, a year-on-year decrease of 6.43%; realized net profit of 688 million yuan, a year-on-year decrease of 23.82%; realized net profit without deduction of 678 million yuan, a year-on-year decrease of 13.54%. The short-term pressure on the company's performance in 2023 is mainly due to the fact that most high-speed optical module products are in the customer-side sample delivery verification stage and have not been shipped in batches. Furthermore, demand in the traditional optical module market is sluggish, and the company's performance has been greatly affected.

With 2024Q1, the company achieved operating income of 1,113 billion yuan, an increase of 85.41% year on year; realized net profit of 325 million yuan, an increase of 200.96% year on year; realized net profit without deduction of 325 million yuan, an increase of 206.69% year on year. As the company continues to make breakthroughs on the customer side, shipments of high-speed optical module products such as 400G have increased dramatically, yield and capacity utilization have increased, cost reduction and efficiency have accelerated, and the company's profit quality has improved markedly.

2. The gross margin of 2024Q1 has been greatly increased, and the ability to control expenses is strong.

In 2023, gross sales margin was 30.99%, down 5.67pct year on year, net margin was 22.22%, down 5.07pct year on year. Gross margin is under pressure in the short term, and profitability is affected.

2024Q1 gross margin was 42%, up 7.96pct year on year, 5.23pct month-on-month, net margin 29.16%, 11.19pct year-on-year increase, 3.55pct month-on-month increase. In 2023, the sales expense ratio was 1.21%, down 0.38pct year on year, management expense ratio 2.46%, down 0.09pct year on year, R&D expenses rate was 4.32%, down 1.34pct year on year, and financial expenses ratio was -3.49%, up 0.27pct year on year. The sales expense ratio of 2024Q1 was 1.84%, up 0.58 pct year on year, management expense ratio was 2.57%, up 0.34 pct year on year, R&D cost rate was 4.78%, down 0.48 pct year on year, but R&D expenses were 53 million yuan, a significant increase of 65.63% year on year. The financial cost ratio was -0.21%, down 0.35 pct year on year. Although there is some pressure on gross margin in 2023, as can be seen in 2024Q1, the company's profit quality has improved dramatically. We believe that, on the one hand, it is due to the drastic improvement in the cost structure of high-speed products, and on the other hand, due to a significant increase in yield and capacity utilization.

3. The company continues to make breakthroughs on the customer side, and 800G/1.6T is expected to achieve rapid growth.

As the network architecture in AI computing power infrastructure becomes more important, the demand for optical modules has increased significantly, and the rate iteration cycle has accelerated. GPU demand for Nvidia's Blackwell architecture is expected to continue to grow rapidly, leading to a broad market space for 1.6T optical modules, which will dispel market concerns about the market demand for optical modules in 2025. Overseas cloud vendors and computing power giants have high entry barriers to supply chains. The pace of optical module updates and iterations has been greatly accelerated, and the optical module industry pattern is expected to become more concentrated. The company is in a leading position in the industry in the 400G era. High-rate optical module products are highly competitive. As the company continues to make breakthroughs in the supply chain of major overseas customers, 800G and 1.6T are expected to achieve batch shipments, achieve rapid revenue growth, and further increase their contribution to performance.

4. Profit forecast and investment advice: The company is the world's leading optical module manufacturer. It has achieved breakthroughs in the 400G era and is in a leading position in market share. As demand for 800G optical modules grows, the company is expected to ship from small batches to batches, and breakthroughs in the company's 200G optical modules can be expected, and the company is expected to continue to gain a leading edge. At the same time, the company is also expected to continue to make new progress in developing new customers, which will support the company's growth. The company's profitability is strong, and its performance is expected to grow rapidly as revenue continues to increase. The rapid development of AIGC will drive demand for high-speed optical modules, and the company is expected to benefit. We expect the company's revenue for 2024-2026 to be 6.156 billion yuan, 9.222 billion yuan, and 11.988 billion yuan, respectively, and the company's net profit to mother will be 1,582 billion yuan, 2,345 billion yuan, and 3,036 billion yuan respectively. The current market value corresponds to PE 38X, 25X, and 20X, maintaining a “buy” rating.

Risk analysis

The progress of the company's 800G and 1.6T optical modules falls short of expectations; there is great uncertainty in the North American macro environment, and there is a risk that the capital expenditure of cloud vendors will fall short of expectations; the accumulation of midstream competition in the optical communications industry, if competition intensifies, will have a great impact on the price of optical modules; many chips are used in optical modules, including electronic chips, optical chips, etc., and the lack of cores will affect the normal delivery of the company's optical module products; the company currently continues to expand new customers in North America to get more orders. If the product does not pass customer certification, its performance lacks new growth points. ; AIGC is developing slowly, and there is a risk that demand for optical modules will fall short of expectations; changes in the international environment affect the supply chain.