Key points of investment

The performance was higher than the median forecast. Q2 gross margin +0.68pct released its 2024 mid-year report. Revenue for the first half of the year was 10.799 billion yuan, +169.7% year over year, and net profit to mother was 2.358 billion yuan, +284.3% year over year, higher than the median forecast. Among them, optical module revenue was 10.404 billion yuan, +164.95% YoY, gross profit margin 33.83%, +3.01pct YoY. Expense rates are continuously optimized, and profitability is improved.

24Q2 revenue for a single quarter was 5.956 billion yuan, +174.88% YoY, +23%, net profit to mother 1.349 billion yuan, +270.8% YoY, +33.7% month-on-month, gross profit margin 33.44%, +2.34pct YoY, +0.68pct month-on-month.

Benefiting from the rapid development of global AI, high-end products such as 800G continue to drive computing power demand. Optical communication networks are an important foundation for computing power networks, driving the growth in demand and technological upgrading of data center hardware by overseas cloud giants, and accelerating the iteration of optical modules to 800G and above products, and the market size is expected to continue to grow. According to Lightcounting's forecast, the global market size of optical modules may continue to grow at a CAGR of 11% from 2022 to 2027, and is expected to exceed 20 billion US dollars in 2027.

The capital expenditure support of the four major overseas CSP vendors continues to increase. The combined capital expenditure of Microsoft, Meta, Google, and Amazon was $57.1 billion in 24Q2, up 66% year over year and 22% month on month.

The company's share of shipments of high-end products such as 800G/400G grew rapidly, and the product structure continued to be optimized. In the first half of the year, the company's overseas sales revenue was 9.45 billion yuan, accounting for 87.5%, and the share of overseas revenue continued to increase.

The share of overseas shipments has increased, and the Singaporean subsidiary's revenue is growing rapidly. The company is promoting an internationalization strategy, increasing overseas production capacity, and meeting the overseas batch supply capacity of key overseas customers.

TeraHop Pte (Singapore subsidiary) is the main body of the company's overseas sales and production capacity. 24H1 revenue was 3.811 billion yuan, +292.3% year-on-year, and net profit was 0.227 billion yuan, +54.9% year-on-year. The revenue growth rate was significantly higher than the net profit growth rate. We think it may be due to differences in domestic and foreign manufacturing divisions, and back-office and sales are concentrated in overseas production capacity.

The world's leading digital optical module, leading in technology, with a clear share advantage. The company is a leading global optical module with forward-looking investment in technology. It has successively laid out silicon optical chips, coherent optical modules, and optoelectronic co-packaging CPO. 1.6T optical modules and 800G silicon optical modules have been successfully developed and have entered the testing stage. At the same time, they are also pre-developing next-generation optical module technology to ensure its technological leadership and competitiveness in the industry.

The company's silicon light solution is gradually being launched. The subsidiary Suzhou PaiSilicon is mainly engaged in silicon chip R&D, design and sales. In the first half of the year, the subsidiary achieved revenue of 0.142 billion yuan (23H1 revenue of 6.1698 million yuan), net profit of 23.96 million yuan, and a net interest rate of 16.9%.

Profit forecasting and valuation

The company is a global leader in optical modules. It has obvious technical and market advantages, continues to expand high-end production capacity, and its performance is growing rapidly. Considering the continuous release of 800G products and above, we expect the company's net profit for 2024-2026 to be 5.528 billion yuan/9.033 billion/ 12.117 billion yuan, corresponding to a PE of 23X in 2024, maintaining a “buy” rating.

Risk warning

Demand for high-speed optical modules falls short of expectations; overseas market development falls short of expectations; industry competition intensifies