Incident: The company released its 2023 annual report. In 2023, it achieved revenue of 710 million yuan, a year-on-year increase of 10.5%; net profit to mother of 60 million yuan, a year-on-year decrease of 49.38%; net profit after deducting non-return to mother was 39 million yuan, a year-on-year decrease of 48.17%. Among them, Q4 achieved revenue of 186 million yuan in a single quarter, up 24.83% year on year and 0.27% month on month; net profit to mother of 0.13 million yuan, down 53.46% year on year and 13.47% month on month; net profit without return to mother was 0.07 billion yuan, down 59.12% year on year and 35% month on month.

Downstream demand is insufficient, and short-term performance is under pressure. Looking at the whole year, the main factors that are putting pressure on the company's performance are 1) the complex macroeconomic environment and macroeconomic fluctuations adversely affect the company's customer demand, supply chain logistics, production and operation, etc., and the European geographical conflict continues to affect the company's overseas business; 2) demand in the optical communication market has declined; 3) demand in the industrial laser industry is insufficient, competition in the domestic market is intense, and the price of fiber laser devices has declined year on year. By sector, in 2023, the company's fiber laser device product revenue was 427 million yuan, +24.25% year on year; optical communication device product revenue was 204 million yuan, -6.52% year on year. Looking at the breakdown, the production/sales volume of fiber laser devices increased by 23.97%/33.31% respectively over the previous year, mainly due to the company's technological innovation, active expansion of domestic and foreign markets, the increase in fiber laser device orders and market share, and the increase in production and sales. The production/sales volume of optical communication devices decreased by 42.49%/39.37% respectively from the previous year, mainly due to the decline in downstream demand for some products with lower unit prices and larger sales volumes, and changes in the company's product structure.

Profitability declined slightly in the short term, and the cost side was well controlled. The company's comprehensive gross margin in 2023 was 34.37%, down 2.55% year on year, mainly due to an increase in domestic sales revenue. Cost-side control is good. The company's sales/management/ financial expenses ratio in 2023 was 1.71% 12.15%/-1.96%, respectively, with year-on-year changes of -0.48/0/1.53pp. R&D investment in 2023 was $123 million, accounting for 17.45% of revenue, +1.9pp. The company will increase research and development of devices and high reliability satellite communication devices used in data centers, AI and CPO related fields, actively promote independent research and development, and strengthen cooperation with research institutes to continuously enhance technological innovation capabilities and enhance the company's competitive strength.

The fund-raising project is progressing smoothly, and the future of thin-film lithium niobate can be expected. In 2023, the company actively promoted the research and development of lithium niobate high-speed modulator chips. Some new products are in the customer verification and small-batch production and shipment stages, and the fund-raising project is progressing smoothly. At the same time, the overseas layout is progressing at an accelerated pace. The company has completed the development and reform of investing in the Thai Optical Depot, completed business registration and obtained an “Investment Promotion Certificate”. It is currently promoting the construction of a production base and equipment procurement for the Thai Optical Depot. It is expected to be officially put into operation in the second half of 2024.

It is expected to maintain the production scale of the Milan optical library for 24 years, continue to reduce costs and increase efficiency; accelerate the development and customer verification of 130GB/200GB CDM and chips for ultra-high bandwidth thin-film lithium niobate modulators and PAM-4 single-wave 200G chips, accelerate the development of the digital communication market, and promote customer verification and small-batch production of PAM-4 chip products.

Profit forecasting and investment advice. EPS is expected to be 0.38 yuan, 0.48 yuan, and 0.61 yuan respectively in 2024-2026, and net profit to mother will maintain a compound growth rate of 36.55% over the next three years. Maintain a “hold” rating.

Risk warning: Risks such as fluctuating downstream customer demand, increased market competition, and falling short of expectations in fund-raising projects.