Incident: The company released its 2024 mid-year report. In 2014, H1 achieved operating income of 3.11 billion yuan, a year-on-year increase of 10.48%; realized net profit to mother of 0.209 billion yuan, a year-on-year decrease of 12.64%.

Comment:

24Q2 performance has picked up, but the overall performance is still in the investment period. It is expected that H2 results will be released at an accelerated pace in Q2: the company achieved revenue of 1.819 billion yuan in a single quarter, up 17.61% year on year, up 40.89% month on month; net profit of 0.131 billion yuan, down 3.99% year on year, up 69.53% month on month; after deducting non-net profit of 0.133 billion yuan, up 1.04% year on year and 82.03% month on month. Taken together, the increase in revenue gradually reflects the trend of the company's order growth, but due to the relative lag in the release of production capacity in the new industrial park, the increase in profit fell short of revenue. It is expected that in H2 in '24, production capacity will be clearly released as equipment is put in place one after another, which will contribute to a significant increase in the company's revenue and profit.

Domestic AI capital expenditure followed the high growth in North America, and the company's digital optical module production capacity began to be released: the AI boom drove the growth of the digital communication device market for four consecutive quarters, and the share of annualized revenue in the optical device market increased sharply from 46.1% in 2023 to 53.7% in the first quarter of 2024. The capital expenditure of North American cloud vendors increased month-on-month, reaching a record high in the face of the spread of AI hotspots. After experiencing a decline in the 2021-2023H1 period, the capital expenditure of Chinese Internet vendors continued to rise, driven by AI hotspots. The capital expenditure of leading Internet companies reached the second-highest level in history, only lower than in the first quarter of 2021. The company continues to improve the delivery capacity of high-end digital communication products. In 24, H1 successfully completed the production capacity construction of the high-end optoelectronic device industrial base in the Wuhan Donghu Comprehensive Free Trade Zone. The new production capacity is mainly 400G/800G high-speed optical modules. Judging from the pace of production expansion, 120 acres of land have been developed in the first phase of the new industrial park, and the remaining 80 acres are being planned for the second phase; according to the company's guidelines, the company's production capacity climbed significantly in July, and production capacity continued to rise in August. It is expected that Q3-Q4 production capacity will be significantly released in Q3-Q4 in '24, and both revenue and profit sides will be reflected.

The results of the company's self-developed optical chips are gradually showing: the company has layouts in optical chips such as DFB, EML, and silicon optics. Judging from the company's overall supply situation, a strategy combining self-development and external procurement was adopted. The company has a high self-supply ratio of medium- and low-speed optical chips. Self-developed high-end optical chips have already begun to be commercialized in small quantities in some products. It is expected that investment in high-end optical chips and production expansion efforts will continue to increase in the future.

Profit forecast, valuation and rating: Considering the pace of the company's new production capacity release (H2 starts in '24), the net profit forecast for 24 years was lowered but increased, and the net profit forecast for 26 years was added. Net profit for 24-26 is estimated to be 0.751 billion billion (adjusted -17%, same below) /1.224 billion yuan (+18%) /1.419 billion yuan. The corresponding PE is 28X/17X/15X, maintaining the “buy” rating.

Risk warning: AI demand falls short of expectations, industry competition intensifies, and the company's new products and market introduction fall short of expectations.