Core views

Although there is some pressure on the company's performance in the short term, the company's demand for transmission and access products is expected to remain stable. Based on this, the company is an industry-leading digital optical module manufacturer and can provide high-speed optical module products such as 400G and 800G. In the context of the explosion in domestic and overseas AI demand, the company is expected to benefit the core. Overall, the company's gross margin has remained stable, and the level of cost control is stable. As high-speed digital communication modules gradually achieve breakthroughs, the company's profitability is expected to increase.

occurrences

Recently, the company released the 2023 annual report and the 2024 quarterly report. In 2023, the company achieved operating income of 6.061 billion yuan, a year-on-year decrease of 12.31%; realized net profit of 619 million yuan, up 1.8% year on year, realized net profit after deducted from non-return mother was 565 million yuan, up 3.45% year on year; 2024Q1, the company achieved operating income of 1,291 million yuan, up 1.79% year on year; realized net profit without return to mother of 77 million yuan, year-on-year decrease of 24.21%; realized net profit without return to mother of 73 million yuan, year on year Decreased by 5.15%.

Brief review

1. Short-term performance is under pressure, and high-speed optical module products are expected to break through.

In 2023, the company achieved operating income of 6.061 billion yuan, a year-on-year decrease of 12.31%; realized net profit of 619 million yuan, an increase of 1.8% over the previous year, and realized net profit without deduction of 565 million yuan, an increase of 3.45% over the previous year. Among them, the company's transmission product revenue was 3.344 billion yuan, down 8.55% from the previous year. Although China's optical transmission equipment expenditure began to grow after two years of decline, demand in the European and Japanese markets declined to a certain extent due to rising inventories and interest rates. The company's revenue for access and data products was 2,664 billion yuan, a year-on-year decrease of 17.01%, mainly due to stable demand in the access network market and declining demand in the traditional cloud computing market. With 2024Q1, the company achieved operating income of 1,291 billion yuan, a year-on-year increase of 1.79%; realized net profit of 77 million yuan, a year-on-year decrease of 24.21%; realized net profit without deduction of 73 million yuan, a year-on-year decrease of 5.15%. Although there is some pressure on the company's performance in the short term, the company's demand for transmission and access products is expected to remain stable. Based on this, the company is an industry-leading digital optical module manufacturer and can provide high-speed optical module products such as 400G and 800G. In the context of the explosion in domestic and overseas AI demand, the company is expected to benefit the core.

2. Gross margin is under short-term pressure, and the level of cost control is stable.

Gross sales margin in 2023 was 22.63%, down 0.98pct year over year. Among them, the gross margin of transmission products was 29.56%, a year-on-year decrease of 0.78pct, and the gross margin of access and data products was 13.04%, a year-on-year decrease of 2.39pct. In 2023, the company's net interest rate was 10.22%, up 1.34pct year on year. The gross margin decreased year on year, but the net interest rate increased, mainly because the cost ratio declined more significantly. In 2023, the sales expense ratio was 2.24%, down 0.25pct year on year, the management expense ratio was 1.92%, the same year on year, the R&D expense ratio was 9.23%, down 0.22pct year on year, financial expenses were -2.55%, down 0.77pct year on year. The gross margin of 2024Q1 was 22.53%, up 0.49pct year on year, and the net margin was 6.02%, down 1.58pct year on year. The sales expense ratio of 2024Q1 was 3.33%, up 1.46 pct year on year, the management expense ratio was 3%, up 0.93 pct year on year, the R&D cost rate was 11.52%, up 0.87 pct year on year, and the financial expense ratio was -2.01%, down 1.06 pct year on year. Overall, the company's gross margin has remained stable. As high-speed digital optical modules gradually achieve breakthroughs, the company's profitability is expected to increase.

3. Telecom market demand is gradually recovering, and digital communication market demand is benefiting from the rapid development of AI.

Although the fixed network access market has rapidly expanded and upgraded after three consecutive years of broadband networks, the pace of construction has slowed down in 2023, but with the advent of the next-generation PON network construction cycle, according to Omdia, more than 60% of the world's operators plan to upgrade to 25G PON or 50G PON networks within two years, so the company's fixed network access products are expected to benefit. 5G-A will become one of the next hot spots in the wireless access market, and a new round of construction is expected to begin in 2024. As the operator's trunk network is upgraded to 400G, the company's demand for high-speed coherent optical modules, amplifiers, and WSS devices will further increase.

AIGC has brought explosive growth in demand in the digital optical module market. Demand for 400G and above high-speed digital optical modules is growing rapidly. The company has the conditions to ship high-speed optical modules in batches, and its performance contribution is expected to increase rapidly.

4. Profit forecast and investment advice: The company is a leading domestic manufacturer of optical modules and optical device products. In the traditional telecommunications market, the company's access network and transmission network-related products have strong competitiveness and continue to grow steadily. In the digital optical module market, the company deeply lays out 400G, 800G and above rate optical module products, maintains close cooperation with leading customers at home and abroad, and shipments are expected to increase rapidly. We expect the company's revenue for 2024-2026 to be 8.171 billion yuan, 10.715 billion yuan, and 13.915 billion yuan, respectively, and net profit to mother of 802 million yuan, 1.08 billion yuan, and 1,469 billion yuan respectively. The current market value corresponds to PE 33X, 25X, and 18X, giving it a “buy” rating.

Risk analysis

The revenue share of the company's telecom markets such as fixed network access, wireless access, and transmission networks is relatively high. If these downstream changes occur, the company's performance will be affected; operators' capital expenses will affect the company's telecom market demand, and there is a risk of uncertainty; gross margin fluctuations and sustainability risks due to falling product prices; there is a risk that the development progress of digital optical module products on the customer side falls short of expectations; the company accounts for a certain proportion of the revenue share of overseas customers. If policies change or tariffs increase, it will have an impact on the company's revenue and profit; AI development falls short of expectations, and the rate of high speed Demand for light transmission modules fell short of expectations.