Event: The company released its 2023 annual report:

1) 23H1: Revenue of 389 million yuan, yoy -1.2%; net profit of 110 million yuan, yoy -7.3%; net profit after deducting non-return net profit of 105 million yuan, yoy -8.1%. Among them, Photonics achieved revenue of about 3.73 million yuan and net profit of 4.53 million yuan.

2) 23Q2: Revenue of 191 million yuan, yoy -2.3%, qoq -3.0%; net profit of 57 million yuan, yoy -13.4%, qoq +7.5%; net profit of non-attributable income of 53 million yuan, yoy -15.0%, qoq +1.9%. Gross profit margin 55.1%, yoy-4.

6pct, qoq-2.4pct; net interest rate 31.7%, yoy-4.5pct, qoq+3.2pct.

23H1's performance remains steady, and it actively invests in R&D to expand new products: the company's business focuses on the fields of lasers and optical communications, downstream demand for 23H1 is recovering slowly, and overall performance remains stable. The company's gross margin declined due to the decline in revenue from overseas optical communication services and increased competition for downstream lasers in a context of weak demand. The company is a global leader in nonlinear optical crystals. In order to continue to explore new growth points, actively invest in research and development of new products, establish photonic layout of ultra-precise optical components, and achieve mass production of novel prism-reflective gold-plated gratings for 5G communication, and supply leading international manufacturers.

Ultra-precision optics has a long-term layout, and employees are cohesive: The company was founded in 2022 until Photonic, focusing on R&D and production of nano-precision ultra-precision optical components and complex opto-mechanical components. It targets cutting-edge high-end optical applications such as semiconductors and biomedicine, and opens up long-term growth space for high-end applications in emerging markets. Previously, through capital increases and stock expansion, Photonics introduced an employee-owned platform (about 27.3% shareholding), which is expected to enhance the cohesion of the core team, thereby accelerating new product development and market development.

The Institute of Physical Structure supports technology and expands production to meet demand: Fujian Construction, a subsidiary of the Chinese Academy of Sciences, is the actual controller of the company, and the company relies on material structure to achieve faster breakthroughs in key materials and technology. In addition, in order to cope with the growing demand for various types of downstream new businesses, the company is actively promoting the second phase of the D building renovation and expansion project. With the gradual expansion of high-end products in emerging markets, the company's revenue scale and profitability are expected to rise.

Investment advice: Considering the slow recovery in downstream demand, we appropriately lowered our previous profit forecast. We expect the company's net profit to be 2.3/29/360 million yuan in 2023-25 (previously expected 2.7/33/41 million yuan), corresponding to PE of 43/35/28 times, maintaining the “buy” rating.

Risk warning: Risk of declining laser market sentiment; growth of the optical communication industry falling short of expectations; new product development falling short of expectations; risk of information not being updated in a timely manner.