The leading domestic switching chip card platform is a high-quality circuit. We expect early investment to turn losses into leading domestic switching chip companies, and enrich the product matrix to enable rapid growth. The company's main business is R&D, design and sales of Ethernet switching chips and ancillary products. The company has focused on product development over the years, and has now formed a rich product series covering the access layer to the core layer, and plans to launch the 25.6T switching capacity Arctic series in 2024. As customer recognition of the company's chip products continues to increase, the company's revenue continued to grow rapidly. According to the 2023 performance report, the company achieved operating income of 1,037 billion yuan in 2023, an increase of 35.17% over the previous year, and achieved net profit of 20.32 million yuan to the mother, which is narrower than the loss for the same period last year. We believe that as the company's revenue continues to grow rapidly, the scale continues to expand, and the upfront investment enters the transformation period, the performance is expected to turn a loss into a profit.
The AI wave is driving the upgrading and iteration of Ethernet switching chips, and domestic replacement of AI is imminent, bringing about infrastructure iterative requirements, and switch speed upgrades. Under the construction of the digital economy and AI, the scale of data centers is gradually expanding. At the same time, the new technological revolution brought about by AI has also driven rapid growth in demand for computing power resources, rapid infrastructure expansion, and continuous iteration of data center servers, switches, and optical modules. According to the IMT-2020 (5G) Promotion Group, the throughput of data center switching chips is expected to reach 51.2 Tb/s in 2023 and 102.4 Tb/s after 2025. Higher speeds of 800 Gb/s and 1.6 Tb/s will become important choices for achieving high-bandwidth data exchange.
The self-sufficiency rate of domestic network equipment chips is low, and domestic switching chips are replacing them. According to data from IDC and Insight Consulting, as of 2020, the global market size of Ethernet switching equipment was 1807.0 billion yuan, and the total global market size of Ethernet switching chips reached 36.08 billion yuan. According to Insight Consulting data and estimates from the Forward-looking Industry Research Institute, in terms of sales statistics, Broadcom, Meiman, and Realtek ranked in the top three with 61.7%, 20.0%, and 16.1% market share respectively. In total, they occupied 97.8% of the market share, and China's core network equipment chip self-sufficiency rate was less than 20% in 2019. The Ethernet switch chip market showed an oligopolistic competitive pattern, and domestic replacement was imminent.
Research and development have continued to improve internal skills. Since its establishment in 2005, the products have continued to iterate against the international leading companies, focusing on independent R&D of Ethernet switching chips. They have built core technical capabilities with independent intellectual property rights, leading domestic positions, and meet localization needs, and have established long-term and stable partnerships with mainstream domestic network equipment vendors and information technology vendors.
According to Insight Consulting data, the 2020 commercial Ethernet switching chip market in China ranked fourth in terms of sales, accounting for 1.6% of the market share, and ranked first among domestic manufacturers in the Chinese commercial Ethernet switching chip market.
Compared with the mainstream technology level of the company's Ethernet switching chips and similar products in the same industry A, the TSINGMA.MX series TSINGMA.MX series is the company's high-end core chip. It has a switching capacity of 2.4 Tbps and supports a maximum 400G port rate. The Arctic series is currently being developed against the highest level in the world. For large-scale data centers, the maximum switching capacity will reach 25.6 Tbps, support a maximum port rate of 800G, and are equipped with advanced features such as enhanced secure interconnection, enhanced visualization and programmability, which will further reduce the gap between China's Ethernet switching chip industry and the international advanced level. At the same time, the company uses the Fabless business model commonly used by integrated circuit design companies, which can focus more on core R&D, improve supply chain efficiency, and ensure a stable supply of production capacity.
The company has high-quality cards. It is a leading manufacturer of switching chips in China. It is continuously developed and iterated. The product is expected to benefit deeply from the popularity of demand for network equipment under the wave of AI development, as well as the trend of domestic substitution. Sales volume and share are expected to continue to increase, driving the company's revenue to continue to grow rapidly, and there is plenty of room for growth.
Profit forecast and investment advice: We expect the company's net profit to be -0.2 billion yuan/0.1 billion yuan/0.4 billion yuan respectively in 2023-2025. The company is a leader in domestic switching chips. It continues to increase the development of high-quality card slots. Considering the company's domestic high-quality card slots, it has benefited from the AI wave and the trend of domestic replacement of switching chips, giving it an “increase in weight” rating.
Risk warning: Product development progress falls short of expectations, risk of industry competition exceeding expectations, risk of AI demand falling short of expectations, risk of continued financial loss, political risk, and subjective estimates, etc.