Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 10.718 billion yuan, and realized net profit of 2,174 billion yuan, an increase of 77.58%; 2024Q1 achieved revenue of 4.843 billion yuan, an increase of 163.59%, and realized a net profit of 1,009 billion yuan, an increase of 303.84%.

The continuous introduction of high-margin products such as 800G boosted the level of profit margins: In terms of performance, driven by 400G and 800G high-margin products, the company achieved a gross profit margin of 32.99% in 2023, an increase of 3.68 pcts, achieving a net interest rate of 20.60% and an increase of 6.80 pcts. Resonance due to the dual factors of product structure optimization and internal management improvements, the company's profit quality improved significantly. On a quarterly basis, the company's revenue, net profit to mother, and sales margin from the first quarter to the fourth quarter of 2023 all showed a continuous upward trend, and this trend continued until 1Q24. As a key device in the field of artificial intelligence, with the continuous deepening of AI development, the rate of iteration may gradually accelerate. In 2023, as a year of rapid development of artificial intelligence, demand for optical modules continues to rise, and the company's performance side verifies the high prosperity of the industry. It is expected that as the 800G product introduction process continues to accelerate, the company, as an industry-leading enterprise, will maintain a relatively high profit margin during the rapid development and iteration of AI, continuing the good growth trend in 2023.

The artificial intelligence market space is growing rapidly, and the company, as an industry leader, is expected to have a first-mover advantage: as artificial intelligence applications represented by ChatGPT continue to be implemented, the global AI industry-related market space is rapidly increasing, and optical modules are the core device for computing power, and the global market space will rapidly increase. In terms of space, according to Lightcounting's forecast, the global market size of optical modules may continue to grow at a CAGR of 11% from 2022 to 2027, and is expected to exceed $20 billion in 2027. China continues to promote the development of artificial intelligence. In 2023, the computing power industry chain continues to be strengthened at the policy level, and the digital economy is booming. Optical modules, as a core product with a high degree of computing power production and cutting-edge technology reserves in China, will usher in rapid growth, driven by factors such as continuous upgrading of computing power and a sharp increase in demand. According to Lightcounting, China's optical module market is expected to reach 6.5 billion US dollars in 2029.

The company's market share is relatively stable and has a first-mover advantage. Using 400G and 800G products and high-quality customers as the market foundation, it is expected to gain a good share in the 1.6T optical module market competition in the future.

Investment advice: We believe that with the gradual deepening of the layout of AI and large models by Internet giants, leading intelligent computing platforms with GPU servers, may become one of the main development directions in 2024 and the future. Demand for high-margin 800G and higher speed optical modules will gradually increase, and 2024 may become an important year for the deployment of high-speed optical modules. At the same time, the development and testing of higher-rate 1.6T optical modules may also be further advanced. As an industry leader, the company is expected to continue to benefit on the basis that the high growth rate of the industry is already present. We predict that in 2024/2025/2026, the company will achieve revenue of 250.34/316.55/ 36.492 billion yuan, an increase of 133.57%/26.45%/15.28%; EPS will be 6.46/7.99/9.23 yuan respectively, corresponding to 2024/2025/2026 PE 29.07/23.49/20.33 times, respectively. Considering the company's leading digital communication business position and core technical competitiveness, we will maintain the “recommended” rating for the company? Risk warning: Risk of AI development falling short of expectations, risk of introducing new products falling short of expectations, risk of R&D progress falling short of expectations, risk of increased industry competition, etc.