3Q revenue continued to improve significantly year-on-year. Three factors led to the loss-making company releasing its 2024 three-quarter report. The first three quarters achieved operating income of 0.178 billion yuan, a year-on-year increase of 91%, a net profit loss of 0.55 million yuan to mother, and a profit of 21.45 million yuan for the same period last year. Q3 achieved revenue of 58.02 million yuan in a single quarter, an increase of 82% year on year and a decrease of 3% month on month. The year-on-year growth rate exceeded 70% for 3 consecutive quarters, and net profit loss to mother was 11.3 million yuan, all of which changed from profit to loss from month to month. Revenue growth is mainly due to a certain recovery in the optical chip industry compared to 2023. Profit losses are mainly due to: 1) shipments of negative gross profit products such as 2.5G are relatively high, gross margin has declined, and accrued inventory impairment has increased as product price competition intensifies; 2) Continued increase in R&D investment in high value-added products such as EML and silicon light; 3) the year-on-year decline in receiving government subsidies and financial management income.

Telecom market competition intensified, and comprehensive gross margin declined

According to the revenue structure disclosed in the company's interim report, the telecommunications market accounts for 91% of revenue and is still the main source of revenue. Previously, the main products in the telecom market were 2.5G, 10G, and 25G products. Due to increased price competition, 2.5G products showed negative gross profit margins. The company's 3Q consolidated gross profit margin was 22%, down 17 percentage points year on year and 10 percentage points month on month.

Demand for 400G and 800G is strong, and the supply of optical chips is tight

According to the statement of optical module leader Zhongji Xuchuang, its tight supply of optical chips will not ease in Q4 this year, as strong demand for 400G and 800G products will continue until the end of the year. Demand for 800G will increase further next year, while demand for 400G is likely to gradually weaken. As the proportion of silicon optical shipments increases and the production capacity of optical chip manufacturers expands, the tense situation of optical chips will be effectively alleviated next year.

R&D investment increased dramatically, focusing on new digital communication and PON products

R&D investment in the first three quarters was 36.02 million yuan, up 59% year on year, accounting for 20% of revenue. In mid-year, the number of R&D personnel increased from 77 in the same period last year to 103, and the proportion of R&D personnel increased from 13.77% to 19%. The company continues to invest in silicon light sources, EML and 50G PON related products:

1) The 50mw/70mw CW light source has mass production capacity and is currently in the yield optimization stage; 2) 100G EML and 100mw CW light sources are in the customer introduction stage; 3) 200G EML products are in the development stage.

Profit forecasting and investment advice

Due to losses in the 3-quarter report, we lowered our forecast for 2024-2026 to be 0.018 billion yuan, 0.149 billion yuan, and 0.235 billion yuan, respectively (the original forecast was 0.05 billion yuan, 0.149 billion yuan, and 0.234 billion yuan). The company's CW light source and high-speed EML are expected to break through domestic and foreign markets and maintain an “gain” rating.

Risk warning: Downstream investment falls short of expectations; product prices fall short of expectations; customer development speed falls short of expectations; product structure and customer composition change; there is a risk of potential competition between some downstream manufacturers and companies.