A leading optical communications company with a vertically integrated layout of optoelectronic devices. The company is a member of China Information Technology Group. It has vertical integration capabilities from chips, devices, modules to subsystems. The products are mainly used in telecom optical communication networks and data center networks. The company's competitiveness in the domestic market is prominent, and it is actively expanding overseas markets. According to Omida data, the company ranks fourth in the global optical device industry and has a high share in transmission networks, access networks, and digital communication. The company's overall growth is steady, with short-term pressure. In the first quarter of 2024, it achieved revenue of 1.29 billion yuan, +1.8% year over year; net profit to mother of 80 million yuan, -24.2% year on year.
AI catalyzes the digital communication market demand, and the company benefits from the construction of domestic computing power. The digital communication market benefits from AI catalysis, and there is a strong demand for high-speed optical modules. The construction of domestic intelligent computing centers is being accelerated, and domestic computing chips are becoming more mature, driving the demand for domestic computing power supporting optical modules to explode. The company's 400G optical modules have been delivered in batches, and orders have been received one after another after 800G products have been delivered. It is expected to benefit from domestic computing power demand and continue to actively break through overseas markets.
The 400G backbone upgrade and DCI network construction are driving the growth in transmission demand. In the telecom market, demand for access networks is stable. According to LightCounting's forecast, the corresponding market size will remain flat year over year in 2024. In the transmission network market, China Mobile has started bidding for 400G backbone OTN equipment in 2023 (total scale of about 3.6 billion yuan), and operators are expected to launch 400G backbone network upgrades one after another. In addition to this, demand for data center interconnection networks (DCI) is expected to explode as the construction of East Digital and Western Computing progresses and intelligent computing centers develop.
The company has an end-to-end solution for optical transmission networks, which is expected to benefit from increased demand for transmission networks.
Competitive advantage: Self-developed optical chips achieve vertical layout, production capacity continues to expand. The company formed three major optical chip platform layouts (planar optical waveguide, III-VI family, and SiP) through self-development and acquisition. Currently, the company has a high self-sufficiency rate of optical chips with a rate of less than 25G, and is actively developing products above 100G. Based on its own chips, the company realizes vertical integration of the industry from chips to subsystems. As a company belonging to a central enterprise, it is also expected to give full play to its vertical advantage and benefit from the development of domestic computing power. In terms of production capacity, the company has expanded production capacity several times to support long-term development. In 2023, the company completed a fixed capital increase of 1.57 billion yuan. The net capital raised will be used for capacity expansion of 5G/F5G, digital optical modules, etc., and the construction of R&D centers.
Risk warning: New products fall short of expectations, competition intensifies, and profitability falls short of expectations.
Investment advice: first coverage, giving an “increase in wealth” rating
The company's revenue for 2024-2026 is estimated to be 80.6/99.7/12.09 billion yuan, respectively, up 33%/24%/21% year on year; net profit to mother will be 7.3/9.3/1.14 billion yuan, respectively, up 19%/27%/22% year on year, respectively. The current corresponding PE is 37/29/24 times, respectively. The company is one of the few domestic companies with vertical integration capabilities from chips, devices, modules to subsystems. It is optimistic about the subsequent 400G backbone network provincial level, DCI network construction, and AI opportunities in the digital communication market. It covered it for the first time, and gave it an “gain” rating.