Incident: On the evening of August 29, the company released its 2024 semi-annual report. During the reporting period, the company achieved revenue of 2.73 billion yuan, a year-on-year increase of 109.1%, and net profit to mother of 0.865 billion yuan, an increase of 200% over the previous year.

Among them, Q2 alone achieved revenue of 1.61 billion yuan, a year-on-year increase of 129.2%, and a month-on-month increase of 45.1% over this year's Q1. Single Q2 achieved net profit of 0.541 billion yuan, a year-on-year increase of 199.5% and a month-on-month increase of 66.6% over this year's Q1.

AI drives high-speed product release, and profit margins highlight the quality of operations. The company's Q2 gross profit margin was 43.8%, up 1.8 percentage points from this year's Q1 and 18.3 percentage points higher than the same period last year; the Q2 net profit margin was 33.5%, up 4.32 percentage points from the first quarter, and 7.85 percentage points higher than the same period last year. The company's profit margin has increased significantly. We judge that on the one hand, the share of revenue from 800G products with higher profit margins has increased, and on the other hand, it has benefited from the company's ability to control costs as always.

Cash flow is healthy and abundant, and inventories highlight the subsequent boom. The company reported a cash inflow of 2.56 billion yuan from operating activities, but due to large purchases of goods and payment of labor costs, the net cash flow from operating activities was -0.29 billion yuan, and the company's inventory reached 2.24 billion yuan, an increase of 0.73 billion yuan compared to the end of the first quarter. Combined with the industry's current boom and historical experience, we expect the company to increase procurement efforts mainly on the raw materials side, leading to a significant increase in expenditure and inventory. In terms of production capacity, the company produced 3.81 million optical modules and sold 3.27 million in the first half of the year. Compared with the same period last year, there was a marked increase, and the product structure was upgraded to a high-speed product with higher profitability.

With R&D as the core, technology drives long-term growth. The company attaches great importance to new technology and product research in the industry. It has now successfully launched 400G, 800G, 1.6T series high-speed optical module products based on VCSEL/EML, silicon light and thin-film lithium niobate solutions, 400G and 800G ZR+ coherent optical module products, and 400G/800G LPO optical module products based on 100g/LANE and 200g/LANE.

With continuous R&D investment and layout, the company has built a complete product system. As an important player in the global optical module market, driven by AI, we expect the company's customer structure to be further enriched, and its 400G, 800G, 1.6T products and LPO and related products are expected to be further expanded, providing impetus for the company's continued growth in performance.

Investment advice: We expect that under the continuous impetus of AI demand, demand and market space for 400G and above high-speed optical modules will be further opened up. The company has always been deeply involved in the high-speed optical module market. While the market space is growing, it is expected to seize major opportunities in the industry, enter more downstream customers, and achieve continuous growth in revenue performance. We expect the company's revenue for 2024-2026 to be 7.24, 14.2, and 18.33 billion yuan, with net profit attributable to mother of 2.4, 4.83, and 6.3 billion yuan respectively, corresponding valuations of 28.9, 14.4, and 11 times. The net profit indicators will increase by 57.1%, 115.2%, and 110.3% to maintain the “buy” rating.

Risk warning: AI development falls short of expectations, computing power demand falls short of expectations, market competition risks, and the company's 1.6T product progress falls short of expectations.