Description of the event

The company released its 2024 semi-annual report, and profits increased significantly year over year. In the first half of 2024, the company achieved revenue of 10.8 billion yuan, +169.7% YoY; net profit to mother was 2.36 billion yuan, +284.3% YoY; net profit after deduction was 2.33 billion yuan, +300.1% YoY. Looking at Q2 alone, the company achieved revenue of 5.96 billion yuan, +174.9% and 23.0%, respectively, and net profit to mother of 1.35 billion yuan, +270.8% and +33.7%, respectively.

Incident reviews

The North American cloud vendor AI Capex grew rapidly, and the company mainly benefited as a major supplier of high-speed optical modules in the first half of the year. Driven by investment in AI infrastructure, the four North American tech giants of Amazon, Google, META, and Microsoft capped 89.75 billion dollars in the first half of the year, +44.1% compared to the same period last year. GPU leader Nvidia achieved revenue of 56.08 billion US dollars in the first half of the year, +171.0% year over year. Increased downstream capital expenditure combined with an increase in the share of AI, and the AI infrastructure market exploded rapidly. Against the backdrop of GPU clusters ranging from 10,000 cards to 100,000 cards, and Nvidia's continuous introduction of new network cards and switches to upgrade network ports, the configuration ratio of optical modules and GPUs continues to increase, and the high-speed optical module market of 800G and above is exploding even more violently. According to LightCounting's latest July report, the global optical module market for AI clusters will exceed 4 billion US dollars in 2024, more than double the previous year, and is expected to exceed 7 billion US dollars in 2025 and reach 12 billion dollars in 2029. The AI market will continue to be in a high growth phase in 2023-2026, after which the slope will slow down but continue to grow. As the main supplier of AI high-speed optical modules in the world, the company seizes market opportunities to take the lead in shipping 800G IB multi-mode & single-mode, 800G ROCE supporting optical modules, etc., benefiting from the explosion of the AI market.

The share of high-speed products increased, gross margin increased year-on-year, and at the same time, increased cost control and efficiency continued to increase net interest rates.

The company's 24Q2 gross margin was 33.4%, +2.3 pct and 0.7 pct, respectively, due mainly to the increase in the share of 400G and 800G high-speed products and the increase in revenue contributions from major overseas AI customers. In the first half of the year, the company's overseas and domestic revenue was 9.47 billion yuan and 1.33 billion yuan respectively, +172.0% and +154.2% respectively. The overseas market still achieved higher growth in the context of a high base, showing the boom in overseas markets and the company's leading position. According to Cignal AI statistics, in the 24Q1 global high-end optical module shipment statistics, the company is the leader in both 400GbE and 800GbE. Furthermore, in the first half of the year, Junge Electronics, an automotive electronics subsidiary of the company, and Chu Han Technology, a subsidiary of connected network optical modules, achieved revenue of 0.28 billion yuan (net profit of 0.013 billion yuan) and 0.28 billion yuan (net profit of 0.023 billion yuan) respectively. After the merger, Junge Electronics performed well, and Chu Han Technology's revenue increased dramatically. In terms of cost ratio, the company paid a total of 97 million yuan in shares in the first half of the year. Through excellent performance and industry position, it continued to motivate high-end talents, while at the same time promoting cost reduction and efficiency. The total sales, management, and R&D expenses accounted for 8.5% of revenue, -5.4 pct year on year, and finally achieved a net interest rate of 22.3% to mother.

Continued expansion of production and stocking shows optimistic expectations for future orders. In terms of fixed assets, the company's book value in the first half of the year was 4.74 billion yuan, an increase of 1.36 billion yuan over the same period last year. The purchase of production equipment and the transformation of the Thai factory were the main factors. Judging from the revenue/fixed asset ratio, it was 2.3 in the first half of 2024 and 1.2 in the same period last year, indicating an increase in capacity utilization and high-end product value. In terms of shipment volume, the production capacity of optical communication transceiver modules in the first half of the year was 9 million, +81% compared to the same period last year, and sales volume was only 6.2 million, +79% compared to the same period last year. Furthermore, in the first half of the year, the company's inventory book value was 6.17 billion yuan, +43.8% compared to the beginning of the year, of which raw materials were 2.32 billion yuan, +39.8% compared to the beginning of the year. The company's production and sales were strong, and continuous stocking welcomed a greater delivery boom.

Profit forecasting and investment advice

We remain optimistic about changes in the AI computing power sector. The core reason is that data centers are shifting from general computing to accelerated computing architectures, and second, AI is transitioning from AIGC explicit apps to hidden capabilities that penetrate all industries, and computing power demand is broad. As the best supplier of optical modules in the world, we are optimistic about the company's medium- to long-term market performance. We expect the company's net profit to be 5.32/9.63/11.31 billion in 2024-2026, respectively, maintaining a “buy-A” rating.

Risk warning

Shipments of AI downstream infrastructure such as GPU servers fell short of expectations, leading to lower expectations in the optical module market; the company's market share declined due to the introduction of new suppliers by North American cloud vendors; there is a risk of a phased decline in ASP and gross margin as AI optical module customer structures become more diversified; changes in tariff policies due to economic and technological friction between China and the US.