Introduction to this report:

Profit forecasts were raised, target prices were maintained, and the increase rating was maintained; performance was in line with expectations, and the acquisition of RFS brought investment returns; the main business was still under pressure, and innovation cost reduction maintained a leading position; continued internationalization and diversification.

Key points of investment:

Raise the profit forecast, maintain the target price, and maintain the holdings increase rating. The company announced its 2024 mid-year report, and the results were in line with expectations. Considering the company's acquisition of RFS affiliates, which confirmed a negative goodwill of about 0.194 billion yuan, which was reflected in the Q2 profit and loss project at one time, we raised 2024 and maintained our results for subsequent years. The net profit to the mother for 2024-2026 was 0.614/0.873/1.175 billion yuan (previous value was 0.441/0.873/1.175 billion yuan), and the corresponding EPS was 0.81\ 1.15\ 1.55 billion yuan. The target price was maintained at $33.77, and the increase in holdings rating was maintained.

The performance was in line with expectations, and the acquisition of RFS brought positive contributions. 2024H1 achieved revenue of 5.348 billion yuan, a year-on-year decrease of 22.66%; net profit to mother was 0.378 billion yuan, a year-on-year decrease of about 37.8%, in line with market expectations. Among them, thanks to diversification, the company's gross margin increased by about 3.4 percentage points compared to 2023. Furthermore, the company completed the acquisition of RFS Germany and RFS Suzhou in 2024H1, confirming revenue of approximately 0.194 billion yuan, which contributed positively to the company's performance.

The main business is still under pressure, and innovation maintains a leading position in cost reduction. In the first half of 2024, according to data from the China Bureau of Statistics, optical cable production fell 24.8% year on year. Against this background, the company's optical cable revenue was 1.929 billion yuan, down 29% year on year; optical fiber and optical rod revenue was 1.279 billion yuan, down about 31.4% year on year. Although the main business is under pressure, the company has a leading position in the industry through continuous cost reduction and efficiency, as well as continuous investment in multi-mode optical fibers used in the field of artificial intelligence and G.654.E business for long-distance applications, which has a positive impact on the overall increase in gross margin.

Continued internationalization and diversified layout. In the first half of 2024, the company's overseas revenue was 1.77 billion yuan to optimize overseas production capacity deployment. The company's optical cable production capacity in Mexico has entered the trial production stage, and production capacity in Poland and Indonesia is expanding smoothly. In the field of third-generation semiconductors, Changfei's advanced semiconductor market is developing smoothly. The main plant at the Wuhan production base was capped in June 2024, and is expected to go through mass production in July 2025. It will become one of the largest and most advanced silicon carbide plants in China. In the field of industrial lasers, the shipment volume and sales revenue of Changfei Guangfang lasers continue to grow; domestic projects in the Haifeng sector are steadily increasing, and the company will continue to explore the market with resources related to submarine cable manufacturing and engineering construction.

Catalysts: Domestic fiber-optic cable demand is picking up; diversification and international layout are advancing; risk warning: domestic operators' investment falls short of expectations; industry competition intensifies.