An established optical communication manufacturer owned by China Information Technology, there are no shortcomings in the comprehensive and in-depth layout of the upstream and downstream industrial chain: the company's predecessor was the Solid State Device Research Institute of the Ministry of Post and Telecommunications established in 1976, the research was restructured in 2001, and landed on the Shenzhen Stock Exchange in 2009, becoming the first communication optoelectronic device company listed in China. After the Wuhan Institute of Post and Telecommunication Science and Technology and the Institute of Telecommunication Science and Technology jointly reorganized to establish China Information Technology Group in 2018, the company became an important position in the field of optical communications under China Information Technology. In the development process over the years, the company has implemented internal and external extensions to achieve full coverage of the upstream and downstream optical communication industry chain without shortcomings, and has the scarce vertical integration capabilities of the entire industry chain, from chips, devices, modules to subsystems. The downstream application scenarios cover not only the digital communication market and telecommunications market (fixed network access, wireless access, optical transmission) in the field of optical communication, but also many emerging application fields such as quantum technology and automotive lidar. There is huge room for future development.

The AI-driven digital communication market resonates with domestic and foreign demand. The company's comprehensive layout of high-end products and autonomous and controllable competitive advantages of optical chips are remarkable, and efforts are concentrated to create a core growth point in the future: AI, on the one hand, is significantly driving demand for high-end digital communication optical modules at home and abroad, and on the other hand, it is also promoting accelerated iteration of optical module rates and the evolution of new technology paths in the field of optical communication. The company has been in the top five in the world in the optical module industry for many years. Currently, high-end products cover 400G & 800G & 1.6T digital optical modules with traditional EML solutions and silicon light solutions, and a comprehensive layout of new technology paths (silicon light, LPO, OCS, etc.). The company's core competitive advantage in the digital communication field is also clearly reflected in autonomy and control in the field of optical chips. The company has laser chips (FP/DFB/EML/VCSEL), detector chips (PD/APD), and silicon optical chip platforms. Using the IDM model, laser chips have self-sufficient mass production capabilities, leading domestic technical strength, and can effectively cope with supply chain risks brought about by rapid growth in AI demand and changes in international relations. In terms of silicon chips, the company is one of the earliest manufacturers to deploy silicon technology in China. At the same time, relying on the National Information Optoelectronics Innovation Center led by the company, silicon chip development progress is at the leading level in the industry. Currently, it has batch capacity for 200G\ 400G\ 800G silicon chips, and has achieved mass production self-sufficiency. In the future, along with the further increase in the penetration rate of silicon light, it is expected to provide important development opportunities for the company.

The telecom transmission market is the company's traditional basic market. The 400G upgrade of the domestic backbone network and the high growth demand for data center interconnection (DCI) are expected to provide important increases: high-end optical passive devices, optical amplifiers, subsystems and other products in the transmission market are the company's traditional areas of strength. Customer barriers and technical barriers are high, and the company has a stable position in the top global rankings for many years. The current 400G upgrade of the domestic backbone network and the high growth in DCI demand driven by AI & East Digital Western Computing will all bring significant increases to related products such as optical devices% modules.

Investment advice: The company is a supplier with full coverage in the field of scarce optical chips/devices/modules/subsystems in China. The digital optical module field has full product coverage and autonomous and controllable optical chips, which is expected to build the company's core growth engine in the future. At the same time, the 400G upgrade of the backbone network and the gradual introduction of 25G/50G PON access networks and rapid development in emerging fields such as commercial use and quantum communication will also provide important development opportunities for the company. We expect the company to achieve net profit of 0.708/1.104/1.505 billion yuan from 2024 to 2026, respectively, corresponding PE of 34/22/16 times, and maintain the “recommended” rating.

Risk warning: AI development falls short of expectations; there is a shortage of core raw materials for optical modules; competition for optical modules intensifies.