Announcement summary: The company released the 2024 interim report, achieving operating income of 10.799 billion yuan, a year-on-year increase of 169.70%, and net profit to mother of 2.358 billion yuan, an increase of 284.26%; net profit after deducting non-return to mother of 2.333 billion yuan, an increase of 300.07% year on year; and net operating cash flow reached 0.968 billion yuan, a year-on-year decrease of 16.23%.

Revenue and profit increased dramatically, and profitability increased month-on-month. In the first half of the year, the company's gross profit margin was 33.13%, an increase of 2.74 pcts over the previous year. The increase in gross margin was mainly due to the rapid increase in the share of shipments of high-end products such as 400G and 800G, as well as continuous cost reduction and efficiency. Looking at a single quarter, 24Q2 achieved revenue of 5.956 billion, up 174.85% year on year, 22.98% month on month, and net profit of 1.349 billion yuan, up 270.60% year on year and 33.70% month on month. In terms of expenses, the company continued to strengthen cost control. In 24Q2, sales/management/R&D expenses rates were 0.74%/2.97%/4.50%, respectively, a year-on-year decrease of 0.28/1.46/3.16 pcts. 24Q2's gross margin increased 0.66pct to 33.43% month-on-month, and net margin increased 1.82pct to 22.65% month-on-month. The decline in operating cash flow may be due mainly to the company's advance preparation to meet current order requirements. The company has also expanded its production capacity, and its operating turnover is healthy. As 800G continues to be released in the second half of the year, and 1.6T products are expected to enter mass production at the end of the year, performance is expected to continue to maintain a high growth trend.

With the Nvidia GB200 iterative upgrade, the demand for 1.6T optical modules is expected to increase. Nvidia presented its 2024-2028 product roadmap at Hot Chips 2024. Among them, the 1.6T ConnectX-9 in 2026 shows Nvidia's demand for PCIe Gen7, which will accelerate as Nvidia maintains the pace of updating GPUs one generation a year.

The deployment requirements of 6T optical modules will continue to help leading companies with leading R&D capabilities to consolidate their market position. The company is a global leader in optical modules. It has leading technical capabilities, significant scale advantages, and sufficient experience in batch delivery. According to the 2023 optical module manufacturer ranking published by Lightcounting, Zhongji Innotech ranked first in the world. The company made good progress in market introduction of products such as 800G EML solutions, LPO solutions, and silicon light solutions in the first half of the year. The key product 1.6T is currently progressing smoothly, and is expected to enter mass production at the end of the year. In terms of production capacity, the Tongling Xuchuang high-end optical module production base project has been completed, the first and second phase of production capacity construction of the Thai factory has been completed, and it can stably mass-produce high-end optical module products to meet the needs of overseas customers. Subsequent construction of new production capacity is also progressing steadily.

Leading R&D and innovation capabilities, leading silicon optical/coherent technologies. The company is based on independent technological innovation to build an internationally competitive R&D, design and manufacturing company for high-speed optical communication transceiver modules. It has single-mode parallel optical design and precision manufacturing technology, multi-mode parallel optical design and coupling technology, high-speed electronic device design, simulation, and testing technology, and has independently developed a fully automated, high-efficiency assembly testing platform. In 2023, the company demonstrated the 1.6T OSFP-XD DR8+ pluggable optical module, a second-generation 800G optical module based on 5nm DSP and advanced silicon photonic technology at OFC2023. Xuchuang developed its own silicon chip, and 400G/800G began introducing the silicon light solution. The BOM cost is competitive compared to EML, and it is expected that the penetration rate of the silicon light solution will further increase the gross margin level in the future. On the related side, Omdia expects to reach 2.5 million units in 2025; the compound annual growth rate of 400G coherent optical modules will exceed 40% from 2022 to 2025. The company's related products can support applications such as 5G backhaul, edge networks, metropolitan area, and DCI interconnection. Currently, a full range of 400G coherent products have been shipped in batches; it has also launched the 400GZR/OpenZR+QSFP-DD coherent module with the highest output power in the industry. With the expansion of computing power clusters, the DCI market has good potential for future growth.

Investment advice: The company is a global leader in optical modules. 800G products are being supplied in batches, and 1.6T is expected to usher in rapid release; moreover, it also has forward-looking processes such as silicon light, CPO, and coherent modules. Based on the company's rapid product release progress, we expect the company's net profit to be 5.146 billion yuan/7.172 billion/ 9.109 billion yuan, and EPS of 4.59 yuan/6.40 yuan/8.12 billion yuan respectively, maintaining the “buy” rating in 2024-2026.

Risk warning: the risk that demand in the North American digital communication market falls short of expectations; the risk of AI development falling short of expectations; the risk of overseas trade disputes; the risk of increased market competition.