Key investment points

Accrued impairment affects current performance, and gross margin is under pressure in the short term

In the first three quarters of 2024, the company's revenue was 0.178 billion yuan, +91.2% YoY, and net profit to mother was -0.55 million yuan, or -102.57% YoY. Net profit after deducting non-return to mother was -4.3536 million yuan, -219.46% YoY. The gross profit margin was 29.69%, -9.36pct year over year. Net profit margin -0.31%, -23.33pct YoY. The 24Q3 company's revenue was 0.058 billion yuan, +82% year over year, and net profit to mother - -11.3014 million yuan, a year-on-year profit and loss.

In the first three quarters, the company's shipments of negative gross profit products such as 2.5G were relatively high, and gross margin declined. As product price competition intensified, the calculated inventory impairment increased. At the same time, in order to respond positively to increased competition in the medium- and low-speed product market, the company continues to increase investment in R&D of high value-added products such as EML and silicon light. Furthermore, the company received a year-on-year decrease in government subsidies and financial management income.

The share of the digital communication business is expected to continue to increase. CW light sources are shipped in batches, and the company's data center and other business revenue doubled in the first half of the year. On the one hand, order demand for some traditional data center markets recovered, and on the other hand, CW light source products used for high-speed silicon optical modules were shipped in batches.

The light penetration rate of silicon is expected to increase rapidly. Silicon photonic solutions are highly integrated and have good performance in terms of peak speed, energy consumption, cost, etc., so they are one of the important future development directions of optical modules. According to Lightcounting's forecast, sales of silicon photonic chips will increase from 0.8 billion US dollars in 2023 to more than 3 billion US dollars in 2029. In the 400G or higher high-speed digital optical module market, the penetration rate of silicon light will reach 48% by 2028, and the market space corresponding to silicon optical modules is expected to be 8 billion US dollars. CW light sources are one of the main laser solutions used in silicon optical modules, and the market size is expected to grow rapidly.

The telecom business continues to optimize its structure, and high R&D investment creates a core advantage. Order demand in the telecom market is gradually picking up. The company's product line continues to be rich, 10G EML products continue to be promoted on the customer side, and revenue has achieved rapid growth. Increased competition in the medium- and low-rate product market affects short-term gross profit margins. In the future, the company will continue to optimize the product structure and steadily increase the gross profit margin of the business.

The company's R&D expenses in the first three quarters were 36.02 million yuan, +59.2% year-on-year, increasing investment in technology and equipment related to products such as high-speed optical chips and high-power optical chips. In the field of optical fiber access, we are actively promoting the development and testing of 25G/50G PON optical network ONU and OLT end optical chip products; in the data center field, 100GPAM4 EML is in product testing, and initially completed performance development and in-factory testing of 200G PAM4 EML.

Profit forecasting and valuation

The company is a scarce domestic supplier of laser chips. Telecom product lines are picking up, and new digital communication products are being introduced at an accelerated pace. Considering the company's CW light source shipments, 100G EML is also expected to expand, but competition in the telecom market is fierce. We expect the company's net profit for 2024-2026 to be 0.035 billion yuan/0.151 billion/ 0.24 billion yuan, corresponding to the 25-year PE of 81X. Considering the company's leading progress in the industry, various digital communication products are expected to be released and maintain the purchase rating.

Risk warning

Development or new product progress falls short of expectations; market competition worsens