1. The Chinese military in network equipment manufacturing. Under the AI wave, product upgrades have given growth imagination space the main business of network equipment R&D, production and sales. It cooperated with network equipment brands in the ODM/OEM model to achieve full product line coverage and successfully mass-produced data center switches. It already has hardware development capabilities for 100G/400G data center switches to achieve mass production and delivery of 2.0T/8.0T products, which is expected to benefit in an environment where AI empowers thousands of industries.
Short-term results are under pressure, and improvements in profitability are expected to return to a growth trajectory. In 2023, the company achieved revenue of 2,075 million yuan (yoy -11.80%) and net profit of 144 million yuan (yoy -26.34%); achieved revenue of 407 million yuan (yoy -19.45%) in the first quarter of 2024, and net profit of 34 million yuan (yoy -38.12%) in the first quarter of 2024. Due to the intensification of competition in the industry, the company's short-term operating profit is under pressure. We expect that with the iterative switch upgrades and demand growth driven by overall AI, the company itself will continue to improve management efficiency, and profits are expected to return to the growth path.
2. Switch iteration benefits from the AI wave. It is expected that high-speed switches may rapidly increase cloud network construction and superimpose the AI revolution, driving data center upgrades, and drive strong switch growth. Large-scale traffic growth is being further promoted under AI catalysis. Large-scale, high-bandwidth, low-latency and high-reliability cluster communication requirements may become inevitable. Demand for network port rate level upgrades is increasing, and cable network capacity expansion and upgrading is imminent, driving the continuous iteration of data center servers, switches, and optical modules, and the industry is expected to accelerate development.
Top-level policies help build a computing power base, and high-speed switches are expected to accelerate penetration. The central government and local authorities are actively promoting the construction of intelligent computing centers. As an upstream computing power-related industry, exchanges welcome development opportunities. According to Dell'Oro's forecast, 800Gbps is expected to exceed 400Gbps by 2025, and we expect 800G switches to rapidly penetrate this year.
3. Network equipment production capacity is shifting inland, and there is a clear trend of domestic substitution of core components, which is expected to quickly open up growth space for local manufacturers
Local manufacturers dominate the switch market, and demand for supply chain security and control is imminent. The quality, performance and reliability of switches directly affect the security of the overall network environment. Therefore, the core component switch chip has a strong domestic replacement trend, which is expected to quickly open up room for growth for local manufacturers.
4. Continue to increase R&D and expand high-end product lines, and cooperate with major customers to seize market opportunities to enrich the industrial chain
Increased R&D will enable breakthroughs to mid-range and high-end products. The company invested 140 million yuan in R&D in 2023, an increase of 33.24% over the previous year, and continued to enhance its technical level. It can respond quickly to customer needs, and at the same time achieve breakthroughs in introducing local switch chip alternatives, help diversify the domestic switch supply chain, and is expected to compete with **** investors for market share.
Implementing the “big customer” strategy and cooperating with leading domestic switch brands, there are strong opportunities for collaborative development. The company's core customer, Xinhuasan, has deep technical accumulation and market recognition in the field of high-speed network construction. The company's procurement scale is increasing. The scope of cooperation is gradually expanding to high-end products, or actively driving the company's performance growth.
Profit forecasts and investment suggestions:
The company is a leading manufacturer of network equipment. It is expected to benefit from the AI wave and domestic substitution trend. It is expected to benefit from the AI wave and domestic substitution trend. We expect the company's net profit to be 1.8/2.6/350 million yuan in 24-26 years, corresponding to a 24-26 valuation of 28/20/15 times. It is covered for the first time, giving it an “increase in weight” rating.
Risk warning: the pace of product development iteration falls short of expectations, risk of industry competition exceeding expectations, risk of high concentration of major customers, risk of downstream demand falling short of expectations