Incident: The company plans to acquire 30% of Wuhan Junheng Technology's shares and actively lay out a new growth business in optical modules. On May 19, 2024, the company signed an “Equity Transfer Intent Agreement” with Hangzhou Hangshiqing Zizeyuan No.1 Equity Investment Partnership and Suzhou Juju Pengfei Venture Capital Partnership to acquire 30% of the shares of Wuhan Junheng Technology Co., Ltd. for 0.195 billion yuan. On June 17, 2024, the company issued an announcement. It has officially signed the “Equity Transfer Contract”, completed the registration of industrial and commercial changes for the share transfer, and officially became the largest shareholder of Wuhan Junheng Technology.

Comment: Revenue and profit for the first quarter of 2024 are in line with expectations, expanding the optical module sector to open up new growth space. The company released its 2023 annual report and 2024 quarterly report on the evening of April 27. In 2023, the company achieved revenue of 0.684 billion yuan, a year-on-year increase of 12.07%; a gross profit margin of 25.20%, a year-on-year decrease of 3.92pct; realized net profit to mother of 0.057 billion yuan, a year-on-year decrease of 1.88%; and realized net profit deducted from mother of 0.048 billion yuan, a year-on-year decrease of 6.53%. On a quarterly basis, in the first quarter of 2024, the company achieved revenue of 0.099 billion yuan, a year-on-year decrease of 2.85%; gross profit margin of 23.69%, a year-on-year decrease of 3.93pct; realized net profit of 0.003 billion yuan, a year-on-year decrease of 41.30%; and realized net profit without return to mother of 0.007 billion yuan, an increase of 248.11% year-on-year.

Wuhan Junheng Technology has been deeply involved in the optical module industry for many years. It has a 400G/800G high-speed data center optical module product matrix, and has deep cooperation with customers such as Finisar and Xinhua. Established in 2012, Wuhan Junheng Technology has long been deeply involved in the development of optical communication products, mainly optical modules. The products cover 100G/200G/400G/800G optical modules, which are used in data centers, cloud computing, AI and other fields to provide customers with ODM/OEM/JDM optical module foundry services. At present, civilian optical module products have become the main source of revenue and profit for Wuhan Junheng Technology. From 2021 to 2023, Junheng Technology achieved revenue of 0.209/0.242/0.435 billion yuan respectively. In terms of optical module OEM customers, Junheng Technology has successively passed the certification of qualified suppliers for important customers such as Finisar and Xinhua in 2021 and 2022; for autonomous optical module customers, the company has established cooperation with domestic and foreign AI and cloud computing manufacturers, including Shangtang Technology and Jinshan Cloud.

Profit forecast and investment suggestions: We are optimistic that the company will fully benefit from the AIGC era to drive the boom in data center construction through the acquisition and layout of optical modules for data centers. The company is expected to achieve revenue of 0.775/0.881/1.003 billion yuan from 2024 to 2026, net profit to mother 0.088/0.124/0.153 billion yuan, and EPS 0.11/0.16/0.20 yuan/share, covered for the first time, giving it an “increase in holdings” rating.

Risk warning: Demand from the digital communication and telecom side falls short of expectations, and business development falls short of the expected risk.