Key points of investment

Incident: The company released its 2024 semi-annual report, 1) In the first half of 2024, the company achieved revenue of 10.8 billion yuan, net profit to mother of 2.36 billion yuan, +284% year-on-year, slightly exceeding the median performance forecast (forecast guide 2.15-2.5 billion yuan); 2) 24Q2 achieved revenue of 5.96 billion yuan, +175% year-on-month, +23% month-on-month, gross profit margin of 33.4%, +2pct year-on-month, +0.7pct month-on-month net profit 1.35 billion yuan, +271% year over year, +34% month over month. The company's performance is in line with market expectations

Demand for high-end optical modules continues to be strong, and the company's revenue scale and profitability have both increased by 24H1. The company's key customers have further increased capital expenses and increased investment in computing power infrastructure. Demand for 400G and 800G optical modules has increased significantly, and the technological iteration of optical modules to 800G and above has accelerated. Benefiting from the rapid increase in the proportion of shipments of high-end products such as 400G and 800G and continuous cost reduction and efficiency, the company's product revenue, gross profit margin, and net profit margin have been further improved, including:

1) 24H1 gross profit margin 33.1%, year-on-year +3pcts, year-on-year net profit margin 21.8%, year-on-year +7pcts; 2) 24Q2 gross profit margin 33.4%, year-on-year +2pct, year-on-month +0.7pct, year-on-month net profit margin 22.7%, year-on-year +6pcts, month-on-month

The company is expected to benefit deeply from next year's high demand boom in 400G/800G/1.6T and the accelerated penetration of silicon light. We believe that next year's industrial demand will have the following trends: 1) Cloud Factory's demand for 800G will be fully released next year under the triple trend of slowing down supply of +H series computing power cards and iteration of self-built Ethernet structures; 2) Nvidia will continue to maintain the advantages of integrating software and hardware systems in training and training, while continuing to optimize its own customer structure, which will further lead the mitigation iteration and application of cutting-edge products such as 1.6T; 3) Silicon Guangmo has materials such as strange light chips The three-tier industrial logic of shortage, acceptance of silicon-based co-packaging trends, and cost reduction is expected to accelerate penetration.

As a leading global manufacturer with close ties to major customers, the company can meet the needs of mainstream customers and expand production in an orderly manner. Against the backdrop of a shortage of upstream materials, the silicon chip layout is deep and is expected to gain structural advantages in material supply, thereby profoundly benefiting from next year's 800G, 1.6T and silicon light industry demand trends.

Profit forecast and investment rating: Considering the high demand for downstream demand in the optical module industry in AI computing power and the company's high barriers in products and customers, we maintain our expectations for the company's 2024-2026 net profit of 5/6.4/8.8 billion yuan. The closing price of PE on August 23, 2024 was 26.8/20.9/15.2 times, respectively, maintaining a “buy” rating.

Risk warning: demand for high-speed optical modules falls short of expectations; customer development and share falls short of expectations; product development and implementation falls short of expectations; industry competition intensifies; supply of raw materials is scarce.