Incidents. On April 29, the company released its 2024 quarterly report, and on April 26, the company released its 2023 annual report. In the first quarter of 2024, the company achieved operating income of 5,059 billion yuan, an increase of 0.85% over the previous year, and realized net profit of 41 million yuan, an increase of 10.93% over the previous year. In 2023, the company achieved operating income of 31.130 billion yuan, an increase of 0.68% over the previous year, and realized net profit of 505 million yuan, an increase of 24.39% over the previous year.

24Q1 performance grew steadily, and the global industrial layout helped iterate and upgrade products. In the first quarter of 2024, the company achieved operating income of 5,059 billion yuan, an increase of 0.85% over the previous year; achieved net profit of 41 million yuan, an increase of 10.93% over the previous year, and achieved a double increase in net profit. On the profit side, the company's gross margin for Q1 in 2024 was 24.83%, up 1.24pct year on year; the net sales margin was 0.81%, up 0.08pct year on year, and profitability improved in the single quarter.

In 2023, the company focused on connectivity and computing power to help build an all-optical base and digital infrastructure to achieve steady revenue growth, achieving revenue of 31.130 billion yuan, an increase of 0.68% over the previous year, and achieved net profit of 505 million yuan, an increase of 24.39% over the previous year. The company has a global marketing service network and industrial layout. By the end of 2023, it had 1+6 industrial bases in China, and had built nearly 400 national optical communication trunk lines in various industries. Fenghuo's smart optical network covers 31 regions across the country, and also has 2 overseas production bases, 8 overseas R&D centers, and 11 global delivery centers around the world to help iterate and upgrade products.

Deeply cultivate the main optical communication industry and seize opportunities for computing power development. The company has a complete set of solutions to support the entire digital industrialization and industrial digitalization. In the main field of optical communication, the company has a relatively complete industrial chain from optical fiber, optical cable, chip to system equipment. The company has mastered the core process of independent optical fiber prefabricated rods and optical fiber production, and has a stable position in the industry. In 2023, the company invested 3,856 billion yuan in R&D, breaking through 50G PON high-capacity, high-density, and three-mode coexistence technology in the field of optical networks, and completed pilot applications for existing operators' networks. In 2023, the company developed its own 19-core single-mode optical fiber based on multi-core multiplexing technology to achieve the world's first system transmission with a net transmission capacity of 3.61 Pbit/s. Meanwhile, FTTR achieved large-scale commercial use in China Telecom and entered the social procurement lists of China Mobile and China Unicom. The chip field independently developed Tbps capacity framing chips and released 800G coherent optical modules. In the field of informatization applications, a “business-driven” big data operating system was launched to comprehensively improve the practical effectiveness of big data in the industry. The company has a leading share in server collection in the operator market and continues to break through in the financial field, achieving large-scale applications for key customers such as ICBC and CCB. In addition, the company actively expanded its computing power and storage business, launched a series of self-developed server products, completed technological breakthroughs in the entire chain of high-end liquid-cooled servers, commercialized self-developed high-end liquid-cooled servers, and achieved commercialization. The cold plate liquid cooling ratio reached the leading level in the industry, and product applications covered various industries such as the Internet, operators, government, and finance.

Profit forecast and investment rating: We expect the company's net profit to be 6.75/8.41/1,043 billion yuan in 2024-2026, and the current stock price corresponding to PE is 31/25/20 times, respectively. We believe that 1) The company has a complete set of solutions to support the entire digital industrialization and industrial digitalization. In the main field of optical communication, it has a relatively complete industrial chain from optical fiber, optical cable, chips to system equipment, and has a stable position in the industry. 2) The company seizes strategic opportunities for the development of computing power, actively expands and expands the computing and storage business, and has the technical advantages of a full chain of high-end liquid-cooled servers. 3) The company actively promotes a global strategy. It has 2 major overseas production bases and 8 overseas R&D centers around the world to help the company iteratively upgrade its products. Therefore, we are optimistic about the company's future performance development, covered for the first time, and gave it a “buy” rating.

Risk warning: risk of macroeconomic fluctuations; risk of new product technology development falling short of expectations; risk of global management; risk of bad accounts receivable.