Incident: On August 29, the company released its 2024 semi-annual report. In the first half of the year, it achieved revenue of 0.12 billion yuan, a year-on-year increase of 95.96%, achieved net profit attributable to mother of 10.7513 million yuan, a year-on-year decrease of 44.56%, and realized net profit without deduction of 9.4702 million yuan, an increase of 129.97% over the previous year.

Industry demand picked up, contributing to year-on-year revenue growth: benefiting from the recovery in industry demand and the further enrichment of the company's product line, the company's revenue and net profit deducted from the mother achieved significant increases in the first half of the year, respectively, while the 44.56% year-on-year decline in net profit was mainly due to a sharp year-on-year decrease in government subsidies received in the first half of the year. Looking specifically at downstream application areas, 1) Telecom market business: The first half of the year achieved revenue of 0.11 billion yuan, an increase of 94.61% over the previous year. The significant increase in revenue was due, on the one hand, to the recovery in demand in the telecom market, and the company's traditional 2.5G and 10G DFB order demand picked up. On the other hand, the product line was further enriched. The high-end product 10GEML was further promoted on the customer side, and its orders increased significantly compared to the same period last year. 2) Data center and other businesses: In the first half of the year, revenue was 10.4925 million yuan, an increase of 111.27% over the previous year. On the one hand, it was due to a certain recovery in order demand in the traditional digital communication market, and CW light sources used in high-speed optical modules were also shipped.

In terms of gross margin, the comprehensive gross profit margin was 33.42%, Telecom's gross profit margin was 29.99%, and Digitong's gross profit margin was 77.59%. In the company's current revenue structure, telecom medium- and low-speed products account for a relatively high proportion. Price competition in related fields is relatively intense, and at the same time, compounded by the impact of overall production expansion, so the comprehensive gross margin declined from the end of last year.

Silicon CW light sources used in high-end digital optical modules were shipped in the first half of the year, and are expected to help the company enjoy the development opportunities brought by AI in the future: Silicon light is one of the important technology paths in the field of optical modules. It has the advantages of high integration, low cost, and low power consumption, adapts to the needs of AI application scenarios, and the penetration rate is expected to continue to increase in the future. In terms of light source chips, compared to EML chips used in traditional optical modules, silicon optical modules use silicon optical CW light source chips. The company has extensive technology accumulation in the field of CW light source chips. The current products cover products such as 50/70/100/150mW 1310nm CW DFB, 25/70mW CWDM4 DFB, etc. CW chips passed testing at some customers in the first half of the year and batch delivery has begun. We believe that in the future, along with the accelerated development of the AI field, CW light source chips will continue to drive demand, and CW light source chips are expected to provide an important driving force for the company.

In addition to CW light source chips, other digital high-end product companies are also continuing to make efforts to focus on future breakthroughs: Among them, 100G PAM4 EML optical chips used in high-end digital optical modules are currently being tested on client side samples. The 200G PAM4 EML is in the product development stage, has initially completed performance development and in-plant testing, and is continuously being optimized.

Investment advice: As a leading domestic optical chip manufacturer, the company continues to focus on high-end domestic alternatives in the telecommunications & digital communication field. It is expected to achieve breakthroughs in the future, and there is plenty of room for growth. We expect the company's net profit to be 0.15/0.251/0.371 billion yuan from 2024 to 2026, and the corresponding PE ratio is 50/30/20 times. Maintain a “Recommended” rating.

Risk warning: Telecom & Digital Communications market demand falls short of expectations, industry competition intensifies, and new products fall short of expectations.