Commercial Ethernet switching chips are contributing incrementally, and data center driving requirements are increasing. According to Insight Consulting, the share of the global commercial Ethernet switching chip market will increase from 50% to 55% in 2020-2025. The main factors are: 1) economic benefits require scale support due to technical and financial barriers; 2) commercial vendors have a first-mover advantage in entering data centers; 3) commercial manufacturers are more able to collaborate with the industrial chain and resist fluctuations in production capacity. It is estimated that the market size of Ethernet switching chips for commercial data centers in China will reach 12.04 billion yuan in 2025, and the CAGR will be 18.0% in 2020-2025, making it the downstream application area with the highest growth rate of commercial Ethernet switching chips. Ethernet switches in data centers require high data transmission+caching capabilities. It is expected that the share of 25G or higher port rate chips mainly used in data centers and operators will continue to increase in 2020-2025, accounting for 60.7% in 2025.

The cost performance advantage is remarkable, and the white box trend is accelerating. White box switches are low in cost, efficient and flexible, and have outstanding advantages when applied to data centers: 1) In terms of cost, commercial hardware is usually based on a common processor architecture and has lower manufacturing costs, which can effectively reduce customer procurement and maintenance costs; 2) In terms of flexibility, white box switches use ONOS, and users can choose operating systems that support different protocols according to actual needs. Programmability also supports the switch to better adapt to changing business requirements, greatly simplifying the network management process; 3) The high-performance hardware and programmable characteristics of white box switches can meet the speed of large amounts of data between data centers Transmission requirements, and its standardized hardware, software and hardware decoupling can also effectively reduce procurement and maintenance costs. RoCE accelerates penetration in AI computing, and more software and hardware functional requirements are expected to catalyze the penetration of white box switches. According to LPInformation, the global white-box switch market is $2.19 billion in 2022, and is expected to reach $5.89 billion in 2029, with a CAGR of 15.1%.

Continuous innovation promotes iterative product optimization, and deeply benefits from the localization process. 1) Since its establishment, the company has continued to focus on independent R&D and design of Ethernet switching chips, forming 11 core technologies including high-performance switching architectures, high-performance port design, and multi-feature assembly lines. The products cover 100Gbps-2.4Tbps switching capacity and 100M~400G port speed. Currently, high-end flagship chips with a maximum port rate of 800G and a switching capacity of 12.8 Tbps and 25.6 Tbps have been sent to customers. Performance such as switching capacity and port rate will reach the level of international competitors. 2) The company has now successfully entered the supply chain of the top five domestic switch manufacturers, including ZTE, Xinhua3, Ruijie Networks, and Maipu Technology. In 2020-2023, the company's domestic market share increased from 1.6% to 5.5%.

Profit forecast and investment rating: We expect the company's 2024-2026 revenue to be 13.8/17.9/2.21 billion yuan, +33%/+29%/+24%, and 2024-2026 net profit to mother of -0.14/0.13/0.52 billion yuan, +30% (loss narrowing)/+291% year-on-year. Since the company has not yet achieved stable profit, the P/S valuation method is selected for valuation. The current market value corresponds to a P/S value of 22.1/16/12 times less than comparable The company's average P/S value was 36.7/28.7/17.3 times, and the first coverage gave it an “gain” rating.

Risk warning: Data center construction demand falls short of expectations, white box switch penetration rate falls short of expectations, localization substitution process falls short of expectations, and industry competition intensifies.