Core views

Although the company's revenue increased in 2023, profits declined significantly, mainly because the macroeconomic environment affected the supply chain and production and operation, the European geographical conflict affected overseas business, fierce competition in the industrial laser industry, and a sharp rise in R&D expenses. The company is a leading optical device company in the industry. It is deeply involved in the field of industrial lasers and optical communication. In the short term, it is negatively affected by industry competition and sluggish demand for traditional cloud computing, but in the long run, as AI demand continues to be strong, the penetration rate of thin-film lithium niobate is expected to increase dramatically. The company deeply lays out the field of lithium niobate modulators, expands domestic and foreign markets, expands production scale and enriches product lines, and is expected to gain a first-mover advantage.

occurrences

Recently, the company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 710 million yuan, a year-on-year increase of 10.5%, realized net profit of 60 million yuan, a year-on-year decrease of 49.38%, and realized net profit without return to mother of 39 million yuan, a year-on-year decrease of 48.17%. With 2024Q1, the company achieved operating income of 160 million yuan, a year-on-year increase of 3.38%, achieved net profit of 06 million yuan, a year-on-year decrease of 58.1%, and realized net profit without deduction of 0.03 billion yuan, a year-on-year decrease of 58.91%.

Brief review

1. Performance is under pressure in the short term and is expected to benefit from AI demand.

In 2023, the company achieved operating income of 710 million yuan, a year-on-year increase of 10.5%, achieved net profit of 60 million yuan, a year-on-year decrease of 49.38%, and realized net profit without deduction of 39 million yuan, a year-on-year decrease of 48.17%. Among them, the company's fiber laser device product revenue was 427 million yuan, up 24.25% year on year, optical communication device revenue was 204 million yuan, down 16.41% year on year, and lithium niobate modulator was 45 million yuan, down 8.16% year on year. Although the company's revenue increased in 2023, profits declined significantly, mainly because the macroeconomic environment affected the supply chain and production and operation, the European geographical conflict affected overseas business, fierce competition in the industrial laser industry, and a sharp rise in R&D expenses. With 2024Q1, the company achieved operating income of 160 million yuan, a year-on-year increase of 3.38%, achieved net profit of 06 million yuan, a year-on-year decrease of 58.1%, and realized net profit without deduction of 0.03 billion yuan, a year-on-year decrease of 58.91%. The company is a leading optical device company in the industry. It is deeply involved in the field of industrial lasers and optical communication. In the short term, it will be negatively affected by industry competition and sluggish demand for traditional cloud computing. However, in the long run, the demand brought by AI will gradually be realized. The company's thin-film lithium niobate devices are expected to be rapidly deployed, and performance is expected to increase dramatically.

2. Gross margin stabilized, and R&D investment increased dramatically.

Gross sales margin in 2023 was 34.47%, down 2.55pct year over year. Among them, the gross margin of fiber laser devices was 29.81%, down 4.6pct year on year, mainly due to intense competition in the industry, prices fell year on year; the gross margin of optical communication devices was 45.18%, up 6.49 pct year on year. The company's net interest rate in 2023 was 8.4%, down 9.96pct year on year, mainly due to a decrease in gross margin, an increase in expenses, and a decrease in other income. In 2023, the sales expense ratio was 1.71%, up 0.47pct year on year, the management expense ratio was 12.15%, up 0.01pct year on year, R&D expenses were 17.45%, up 1.9pct year on year, financial expenses were -1.96%, up 1.52pct year on year, mainly due to changes in exchange rates. 2024Q1's gross margin was 34.54%, up 0.9 pct year on year, net margin was 4.05%, down 5.95 pct year on year. The sales expense ratio of 2024Q1 was 1.76%, down 0.09pct year on year, the management expense ratio was 13.97%, up 2.74pct year on year, R&D cost rate was 19.65%, up 0.09pct year on year, and the financial expense ratio was -1.12%, up 1.22pct year on year. The company's R&D investment has increased dramatically to ensure future competitiveness.

3. With the in-depth layout of thin-film lithium niobate products, the company is expected to benefit the core.

The network is cost-effective throughout the AI data center and can significantly improve the efficiency of computing power. In AI data centers, more and more customers are choosing network hardware with greater bandwidth. The larger the bandwidth, the lower the cost per bit of transmission, lower power consumption, and smaller size. Demand for 800G optical modules has increased dramatically, and mass production of 1.6T optical modules has been greatly accelerated, and it is expected to become the main demand force in 2025. A thin-film lithium niobate modulator is an integrated electro-optical modulator prepared on a nm-thick thin-film lithium niobate crystal. It is an ultra-high speed electro-optical modulator for coherent optical communication and signal transmission in uncoherent data centers. In the digital communication field, thin-film lithium niobate modulators are highly competitive in 100g/LANE application scenarios. As AI demand continues to be strong, the penetration rate of thin-film lithium niobate is expected to increase dramatically. The company deeply lays out the field of lithium niobate modulators, expands domestic and foreign markets, expands production scale and enriches product lines, and is expected to gain a first-mover advantage.

4. Profit forecast and investment advice: The company has been deeply involved in the field of fiber lasers and optical communications for many years, and is a leading domestic optical device company. The company's fund-raising project lithium niobate modulator is widely used in many downstream markets, and its performance contribution is expected to increase significantly as production capacity gradually expands. The company is also developing thin-film lithium niobate devices, which will further broaden the scope of application and open up new space. The company has been working in the field of lidar for many years, and as downstream customers begin to gradually expand, the company is expected to benefit. We expect the company's revenue for 2024-2026 to be 909 million yuan, 1,187 billion yuan, and 1,539 million yuan, respectively, and net profit to mother of 85 million yuan, 118 million yuan, and 165 million yuan respectively, corresponding to PE 113X, 82X, and 59X, giving it an “increase in holdings” rating.

Risk analysis

The company's fiber laser business accounts for a relatively high proportion. If industry demand continues to weaken, it will have a big impact on the company's performance; the company's lithium niobate device fund-raising project is the main driving force for the company's future performance, and if the progress of the project falls short of expectations, it will have a great impact on performance; changes in the international environment, the energy costs of the company's overseas factories continue to be high, which has a significant impact on the sales revenue of optical communication products; if mass production is slow, there is a risk of falling short of market expectations; The future market space for thin-film lithium niobate is broad, but if the development progress of new products falls short of expectations, it will affect the company's competitiveness in the industry.