Incident: On the afternoon of August 28, the company released the “2024 Semi-Annual Report”. 24H1 achieved operating income of 0.532 billion yuan (yoy -17.28%), net profit attributable to mother of 0.057 billion yuan, net profit of non-return to mother 0.08 billion yuan, and achieved EPS of -0.14 yuan.

Q2 Revenue continued to increase month-on-month, and R&D investment affected short-term performance under pressure. 24H1 achieved revenue of 0.532 billion yuan (yoy -17.28%), mainly because some downstream customers of 23H1 increased their preparation efforts, which led to increased volatility in the company's 23H1 revenue. Since '24, abnormal fluctuations have been gradually eliminated, and procurement has gradually returned to normal. 24H2 orders are expected to increase month-on-month compared to 24H1. 24H1 achieved net profit attributable to mother - 0.057 billion yuan, net profit deducted from non-mother - 0.08 billion yuan, mainly due to:

1) 23H1 customers have increased inventory fluctuations, and the base is higher. 24. Shipments gradually returned to normal; 2) 24H1 increased investment in new product development and expanded the R&D team, putting pressure on the mother's net profit.

Looking at a single quarter, 24Q2 achieved revenue of 0.278 billion yuan (qoq +9.30%, 24Q1 qoq +58.80%), continuing the month-on-month recovery trend.

The share of 24H1 Ethernet switches in revenue continues to rise, and the Arctic series high-end chips are progressing smoothly. 24H1's Ethernet switching chips achieved revenue of 0.429 billion yuan, accounting for 80.64% of revenue (76.30% at the end of '23). The company's 12.8T and 25.6T Arctic series chip products for large-scale data centers and cloud services have been sent to customers for testing in 23 years, delivered in small batches for 24 years, and can support a maximum port rate of 800G.

Gross margin increased year-on-year, and the profitability of all 24H1 product lines increased compared to the end of '23. 24H1 achieved gross margin of 37.46% (yoy+6.01pct). By product, 24H1's gross margin of Ethernet switching chips was 30.92% (+2.15pct compared to the end of 23), the gross margin of Ethernet switching chip modules was 67.69% (+4.73pct compared to the end of 23), and the gross margin of Ethernet switches was 59.61% (+4.43pct compared to the end of 23).

Actively invest in R&D to promote product matrix expansion and iteration. 24H1's sales expense ratio was 3.90pct (yoy+1.53pct) and management expense ratio was 5.48% (yoy+2.14pct), a slight increase over the previous year.

In terms of R&D expenses, 24H1's R&D investment reached 0.224 billion yuan (yoy +73.92%), and the R&D cost rate reached 42.11% (yoy+22.08pct). The company adheres to a long-term development strategy, closely follows the development trend of domestic substitution, and responds positively to the overall requirements of downstream customers for improved product performance and specification richness:

1) In terms of mid-range and low-end products: The company actively promotes product line expansion and iterative upgrading; 2) In terms of high-end products, the company's 12.8T and 25.6T Arctic series products are progressing smoothly and continues to carry out forward-looking technology research and development and layout, striving to build its core competitiveness in the high-end data center market.

Investment advice: The company's net profit due to mother in 2024-2026 is expected to be -0.082 billion yuan, 0.037 billion yuan, and 0.246 billion yuan, respectively, maintaining an “increase in holdings” rating.

Risk warning: Increased market competition, rising raw material prices, uncertainty in new product development, lifting of the ban on restricted shares.