Key investment points

Incident: On December 20, 2024, the company issued an announcement on foreign investment in the construction of optical communication high-speed modules and optical devices (Phase I), and an announcement on foreign investment in the construction of optical communication semiconductor laser chip projects (Phase I).

The company invests abroad to build high-speed optical communication modules and upstream chip production lines to accelerate the optical communication field layout. After the company successfully acquired Ruigu in Guangdong and the optical module team in 2023, the company continued to strengthen the layout of the optical communication field through foreign investment: 1) On the upstream chip side, the company plans to build a “0.1 billion annual optical communication semiconductor laser chip project (Phase I)” through Megachi Semiconductor or its subsidiaries, and build a gallium arsenide and indium phosphide compound semiconductor laser wafer manufacturing production line. The proposed investment amount for the first phase of the project is no more than 0.5 billion yuan, the construction cycle is expected to be 3 years; 2) On the optical communication module side, the company plans to invest in the construction of the “Optical Communication High Speed Module and Optical Device Project (Phase I)” through Zhaochi Optolink, a subsidiary of Megachi Communications, and build an optical communication high-speed module and optical device manufacturing production line. The project covers 100G and below, 200G, 400G, 800G and other high-speed optical modules. The first phase of the project plans to invest no more than 0.5 billion yuan. The construction period is expected to be 3 years. After the first phase of construction is completed, the company will have an annual output of 50 million units. High rate optical module capability.

The company further strengthens the vertical integration layout in the field of optical communication, and the optical communication industry chain is expected to become another growth point for the company

The rapid development of AIGC has driven the optical communication market into a new growth cycle. With the continuous upgrading of downstream digital communication and telecom applications, telecom operators and cloud computing vendors have begun a new round of capital expenditure cycles, and demand for optical module capacity and technical difficulty continues to rise. In this context, the company completed vertical integration of devices and modules in the optical communication field through the acquisition of Guangdong Ruigu and the optical module team in 2023. Currently, the company will accelerate the layout of optical communication field through foreign investment. On the one hand, the company will further expand the production scale of optical communication module devices and accelerate technology upgrades, developing from access network modules below 100G to 200G/400G/800G and above high-speed optical modules to meet the incremental demand for optical modules brought about by the rapid development of AIGC, and achieve iterative technology upgrades. Adhering to the layout idea of integrating the entire industry chain, the future product development plan of Zhaochi Semiconductor is closely coordinated with the expansion of the scale of optical communication modules and technological upgrades to strengthen the vertical integration of the company's optical chips - optical devices - optical modules. This will also help the company form a clear cost advantage in the field of optical communication, give full play to synergy, and accelerate the company's transformation to a high-tech circuit.

In terms of the optical communication industry chain, the company plans to start with the telecommunications market and gradually expand into data communication markets such as cloud computing and big data, as well as emerging fields such as industrial automation and autonomous driving. In the future, the optical communication industry chain is expected to become another new growth point for the company after the LED industry chain, working with the entire smart terminal and LED industry chain to help the company's performance grow.

Profit forecast: The company's revenue for 2024-2026 is estimated to be 21.8, 26.2, and 31.2 billion yuan, respectively, and net profit to mother is 1.825, 2.3, and 2.848 billion yuan, respectively. The corresponding PE is 13.04, 10.35, and 8.36 times, respectively, maintaining the “increase” rating.

Risk warning: The TV terminal ODM industry experienced a decline in demand; COB directly showed that penetration and growth fell short of expectations; optical communication business growth fell short of expectations.