Company profile
The company is the leading manufacturer of optical device platforms in the industry. Through independent R&D and epitaxial mergers and acquisitions, we have accumulated many world-leading core process technologies in the field of basic materials such as precision ceramics, engineering plastics, composite metals, optical glass, etc., and have formed two core business segments: overall optical device solutions and advanced optical packaging supported by 16 product lines, to provide customers around the world with a variety of vertically integrated one-stop product solutions. Benefiting from the explosion in computing power demand brought about by AI, the company achieved revenue of 1,939 billion yuan and net profit to mother of 730 million yuan in '23, an increase of 62% and 81%, respectively. 24Q1 continued its high growth trend, achieving revenue of 732 million yuan and net profit of 279 million yuan to mother, up 155% and 203 percent, respectively.
Investment logic
Demand for computing power continues to rise due to the development of AI, and the prosperity of the optical communications industry continues to rise. Large model iterations have led to an exponential increase in computing power demand, and the difference between supply and demand with the single card computing power provided by Moore's Law has driven a boom cycle for optical modules. Factors such as changes in network architectures and hardware iterations, and downstream cloud vendors continuing to increase AI and cloud business capital expenses continue to drive the expansion and prosperity of the industry. 1) Demand for optical modules in the network architecture of cloud data centers has increased, followed by the evolution of pluggable optical modules to more technology routes such as silicon light and CPO. The company's forward-looking optical engine can adapt to different optical module technology paths. 2) In order to meet computing power requirements such as large model iteration and implementation, downstream cloud vendors continue to increase capital investment in AI and cloud services. The total capital expenditure of the four major overseas cloud vendors in 24Q1 was US$44.289 billion, an increase of 31%. At the same time, they are optimistic about the annual capital expenditure guidelines.
The forward-looking layout of the light engine is expected to become a new growth pole for the company's performance. As data center interconnection bandwidth continues to be upgraded, problems such as optical module power consumption, switch port density, and optoelectronic switching capacity have become prominent, and optical engines have become a solution with excellent integration and performance. Relying on the accumulation of technology in passive devices and active packaging, the company has forwardly laid out high-speed light engine solutions. In 2020, the company raised 786 million yuan to invest in high-speed optical engine construction projects for 5G and data centers through fixed increases. With the development of artificial intelligence and the increase in demand for computing power, demand for high-speed optical modules such as 800G/1.6T is gradually released, and the company's optical engine business is expected to usher in new opportunities for development.
Profit forecasts, valuations, and ratings
The company's net profit for 2024-2026 is estimated to be 1,431 billion yuan, 2,658 billion yuan, and 2,819 billion yuan, corresponding to EPS of 3.62 yuan, 5.71 yuan and 7.12 yuan. We are optimistic that the company is a leading supplier of platform-based optical devices in the industry, and the light engine business is expected to become a new growth pole for the company's operations. We gave the company a “buy” rating of 45 times the 2024 valuation, with a market value of 64.415 billion yuan and a target price of 162.81 yuan.
Risk warning
Market competition intensified; product iterations fell short of expectations; downstream demand fell short of expectations.