Key points of investment:

Incident: The 2016 semi-annual report was released. Revenue grew rapidly and profits were under pressure. 1) 24H1: Revenue 0.12 billion yuan, +95.96% year over year; net profit to mother 10.75 million yuan, -44.56% year over year; net profit 9.47 million yuan, +129.97% year on year; gross profit margin of 33.42% (-5.59pcts year over year). The increase in revenue was mainly due to the year-on-year recovery of the optical chip industry, and the company's product line was further enriched. The decline in profits is mainly due to a sharp decrease in government subsidies over the same period last year, increasingly intense price competition, and an increase in investment and production costs in production facilities. 2) 24Q2: Revenue 60.1 million yuan, +127.07% YoY, +0.05% month-on-month; net profit to mother 0.22 million yuan, -97.13% YoY, -97.95% month-on-month; net non-net profit -0.1 million yuan, -101.04% month-on-month; gross profit margin 32.00% (-2.07pcts YoY, -2.84pcts month-on-month).

R&D investment has increased rapidly, and cost control is better. 24H1 R&D expenses were 22.05 million yuan, +67.12% YoY, R&D expense ratio 18.35%, YoY -3.17pcts; Sales Expense Ratio 3.23%, YoY -1.69pcts; Management Expense Ratio 9.54%, YoY -11.22pcts; Financial Expense Ratio -8.32%, YoY +7.42pcts

Telecom digital products have all experienced high growth. 1) 24H1 telecom market revenue of 0.11 billion yuan, +94.61% YoY; gross profit margin 29.99%. Mainly due to market recovery, the company's product line was further enriched, demand for traditional 2.5G/10G DFB orders picked up, 10G EML was further promoted on the customer side, and orders increased dramatically. 2) Data center and other revenue of 9.2226 million yuan, +408.78% year-on-year; gross profit margin 77.59%.

Mainly due to a certain recovery in order demand in some traditional data center markets, and delivery of CW light source products for high-speed modules. 3) Domestic revenue 0.12 billion yuan, foreign revenue 0.1898 million yuan.

High-end optical chips are progressing in an orderly manner, and CW light sources are delivered in batches. 1) Optical fiber access: 10G EML is further promoted on the customer side; development and testing of 25G/50G PON ONU and OLT end optical chips are carried out. 2) Data center: CW products passed testing in some customers and began batch delivery; performance development and in-factory testing of 200G PAM4 EML were initially completed.

The 24-year equity incentive draft was released, and the revenue target was to grow rapidly. It is proposed to grant 0.5717 million restricted shares, accounting for 0.67%, of which 0.4574 million shares will be granted for the first time. Incentives were awarded to 176 people for the first time, accounting for 32.47%. For the first time, the three performance assessment targets were: 24-year revenue of not less than 0.22 billion yuan, 24-25 cumulative revenue of not less than 0.52 billion yuan, and 24-26 cumulative revenue of not less than 0.92 billion yuan.

Profit forecast. We believe that as overseas demand picks up and AIGC boosts demand for high-speed optical chips at home and abroad, the company's high-speed optical chip products are launched, and the business is expected to maintain rapid long-term development. We estimate that the company's net profit for 24-26 will be 0.05, 0.139, and 0.213 billion yuan, respectively, and the corresponding EPS will be 0.58, 1.62, and 2.49 yuan, respectively. Referring to the company's historical valuation and the average valuation level of comparable companies, the company was given a 2025 PE range of 70-80X, corresponding to a reasonable value range of 113.40-129.60 yuan, which is “superior to the market” rating.

Risk warning. Industry demand is picking up and uncertainty, downstream manufacturers are expanding upstream, and industry competition is intensifying.