Leading domestic Ethernet switching chip company, Arctic high-end series sample delivery test. Since its establishment in 2005, the company has been focusing on R&D, design and sales of Ethernet switching chips and supporting products. It has covered Ethernet switching products from the access layer to the core layer. The switching capacity range is 100Gbps to 2.4Tbps, and the port rate range is 100M~400G. It is fully used in enterprises, operators, data centers and industrial networks, and has a maximum switching capacity of 25.6Tbps against the highest international standard. It supports a maximum port rate of 800G. Samples were sent for testing at the end of 2023. Its large-scale delivery is expected to further enhance the competitiveness of the company's products in ASP and high-end fields. Benefiting from the continuous enrichment of the Ethernet switch chip matrix and the increase in customer orders, the company's revenue CAGR reached 56.42% in 2018-2022, up 35.17% year on year in 2023, up 35.17% year on year. 24Q1 revenue improved month-on-month. As product structure optimization and mass production scale effects become apparent, profitability is expected to gradually improve.

AI drives high-speed iteration of switching chips, and the competitive landscape concentrates high barriers in the industry. Driven by ChatGPT, tech giants and cloud vendors have increased their investment in AI, the demand for large model computing power networking has expanded, and the demand for large-scale, high-bandwidth, low-latency, stable and reliable networks has increased, and the iteration of switching chips has accelerated. Ethernet narrows the performance gap with the InfiniBand network AI scenario through technological innovation. As demand for AI inference side computing power grows, it is expected to compete for the share of AI networks based on cost performance and ecological advantages. Spectrum-X, the AI high-performance Ethernet architecture deployed by Nvidia, is being mass-produced with multiple customers, including a 0.1 millionGPU large cluster, which is expected to become a multi-billion dollar product line within 1 year. Broadcom's FY24Q2 switching chip sales doubled year over year. Currently, 7 of the 8 largest clusters all use Broadcom's Ethernet solutions. As one of the largest chips in the AI computing power cluster, switching chips naturally have barriers such as high R&D difficulty, long verification cycles, and large capital investment, forming a highly concentrated competitive pattern around the world. In 2023, the global Ethernet switching chip market is about 40 billion yuan, and the domestic commercial Ethernet switching chip market is about 14.4 billion yuan. As the demand for AI computing power grows, there is a broad market space for switching chips.

Establish a domestic first-mover advantage, enrich the product matrix, and benefit from AI computing power and localization. The technical barriers to switching chips are high. Overseas manufacturers such as Broadcom, Cisco, and Marvell have been dominant for a long time, and the self-sufficiency rate of domestic switching chips is low. As the domestic market expands and demand for autonomous and controllable controls increases, we believe that localization of switching chips is the general trend, and the share of domestic commercial chips may increase further. The company has long focused on independent research and development of Ethernet switching chips, and has formed technical capabilities with independent intellectual property rights to meet the needs of localization. The Arctic (12.8T/25.6T) series products released domestically will reduce the generation gap with overseas giants. With the successive introduction of mid-rate 1T-6T segment products, it will enrich the product matrix in the middle and high-end market to cover more market needs. Domestic AI is accelerating innovation, and the optimization of inference costs for large domestic models is expected to drive application implementation. Operators and others will increase investment in intelligent computing, and AI computing power is expected to maintain strong demand. Domestic 400G and above speed switches are expected to enter the first year of release, driving rapid growth in demand for switching chips.

Investment suggestion: Shengke Communications is the leading domestic switching chip. It continues to increase R&D investment to enrich its product matrix, and release the Arctic series with a maximum switching capacity of 25.6 Tbps, which will enhance the competitiveness of ASP products and high-end fields, benefit from high growth in AI computing power and the trend of localization, and have a lot of room for growth. We expect the company's 2024-2026 revenue to be 1.339 billion/1.853 billion/2.271 billion yuan, net profit of -0.008 billion/0.051 billion/0.103 billion yuan, and EPS of -0.02 yuan/0.12 yuan/0.25 yuan respectively, corresponding to the 2024 PS of 11x, lower than the comparable average, initial coverage, and a “buy” rating.

Risk warning: risk of AI development falling short of expectations; risk of product development falling short of expectations; risk of technology leakage; risk of overseas trade disputes; risk of continued financial loss; risk of increased market competition; risk of macroeconomic fluctuations; research reports

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