Revenue returned to growth in 2Q, and gross margin continued to be under pressure

Changguang Huaxin released its semi-annual report. 1H24 achieved revenue of 0.127 billion yuan (yoy -10.4%) and net profit to mother of -42.48 million yuan (1H23: -10.64 million yuan). 2Q24 achieved revenue of 74.87 million yuan (yoy +44.62%, qoq +42.65%) and net profit to mother of -23.03 million yuan (2Q23: -12.11 million yuan). Looking forward to the future, we expect performance to recover after downstream demand recovers, and we are optimistic that the company will use the advantages of optical chip platforms to open up long-term growth space. We expect net profit to be 0.06/0.03/0.04 billion yuan for 24-26. Considering the company's leading position in high-power laser chips, it is expected to be the first to benefit from downstream demand recovery, giving the company a 24-year PS 18.0x (according to Wind's unanimous expectations, the 24-year average PS is 11.8x), and a target price of 33.84 yuan. Maintain a “buy” rating.

1H24 review: 1Q output shortfall affected revenue, 2Q revenue returned to growth, and gross margin declined due to competition

The decline in 1H24's revenue was mainly due to personnel fluctuations and the difficulty of producing scientific research modules. 1Q24 experienced insufficient output, and revenue declined. The company made targeted adjustments in 2Q24 to achieve revenue of 74.87 million yuan (yoy +44.62%, qoq +42.65%) and returned to the growth trajectory. Looking at 1H24 by business segment, 1) the revenue of the high-power single-tube series was 0.1 billion yuan (accounting for 80.0%), a decrease of 20.5%; 2) the revenue of the high-power bar series was 16.34 million yuan (accounting for 12.8%), an increase of 39.6%; 3) the revenue of the high-power VCSEL series was 1.59 million yuan (accounting for 6.0%), an increase of 59.4%. In terms of gross margin, 1H24 gross profit margin was 26.4%, a decrease of 5.0 pp; 2Q24 gross profit margin was 26.8%, with a circular increase of 0.8 pp. The decline in the company's 1H24 gross margin was mainly due to increased competition in the industry, and the prices of products such as optical fiber coupling modules in the industrial market fell further. Furthermore, the company's inventory level was high, and the 1H24 asset impairment loss was 24.36 million yuan.

The high-power semiconductor laser chip industry is leading the way, officially entering the high-end optical communication chip market. According to the company's 2024 semi-annual report, the single-tube chip developed by the company has a continuous power of more than 100W at room temperature (500 μm chip width) and a working efficiency of 62%. This is the record for the highest level of single-tube chip power that has been reported so far, opening a new era of 100-watt single-tube chips. In 2023, the company launched single-wave 100GEML (56GBd EML modulated by PAM4), 50G VCSEL (25G VCSEL modulated by PAM4), and 100mWCW DFB high-power optical communication laser chips. The company's optical communication products are the core components of the current 400G/800G/1.6T supercomputing data center interconnect optical modules.

Give a target price of $33.84 and a “buy” rating

Considering that competition in some downstream markets of the company is still fierce, we lowered net profit from 24-26 to -0.06/0.03/0.04 billion yuan (previous value: 0.04/0.08/0.09 billion yuan). Considering the company's leading position in high-power laser chips, it is expected to be the first to benefit from downstream demand recovery, giving the company a 24-year PS 18.0x (according to Wind's unanimous expectations, the 24-year average PS is 11.8x), and a target price of 33.84 yuan (previous value: 45.0 yuan). Maintain a “buy” rating.

Risk warning: EML chip development progress falls short of expectations, and digital communication market customer development falls short of expectations.