Core views
In the short term, demand for optical fiber cables is under pressure due to the decline in demand for optical fiber cables from domestic operators, high inventory cycles in overseas markets, and weak export performance. As the subsequent inventory cycle of overseas operators returns to normal levels, exports of optical rods and optical fiber cables are expected to pick up. In addition, the company actively lays out special optical fibers, air core optical fibers and other fields. G.654.E optical fiber has deployed nearly 2 million core kilometers around the world and has been successfully used in network infrastructure projects in many countries. Air core fiber is expected to provide 10 Gbps transmission rate and millisecond transmission delay for AI data centers, and is expected to become a new growth point for the company in the future.
occurrences
In 2023, the company achieved operating income of 13.353 billion yuan, a year-on-year decrease of about 3.45%. The company's gross margin level increased from 23.45% in 2022 to 24.50% in 2023, and net profit to mother was 1,297 billion yuan, an increase of 11.18% over the previous year. In the first quarter of 2024, the company achieved operating income of 2,387 billion yuan, a year-on-year decrease of 25.29%; realized net profit to mother of 57.92 million yuan, a year-on-year decrease of 75.97%.
Brief review
1. Looking at domestic and foreign demand for optical fiber cables in the short term, wait for the industry to bottom up.
In 2023, the company achieved operating income of 13.353 billion yuan, a year-on-year decrease of about 3.45%, and net profit to mother of 1,297 billion yuan, an increase of 11.18% over the previous year. The company's gross profit margin was 24.50%, up 1.05 pct year on year. The main reason was that the company continued to improve the gross margin level of light stick products through efficiency improvement and process optimization. In 2023, the company's light stick gross margin reached 53.15%, an increase of 5.62 pct year on year. From 2023Q4 to 2024Q1, the company's revenue and net profit after deducting both declined. It is estimated that, firstly, domestic operators' demand for optical fiber cables has declined; second, overseas market inventory cycles are high, and export performance is weak.
2. Exports are expected to pick up when the overseas storage cycle is over.
From January to May 2024, the export value of optical fiber prefabricated rods was 246 million yuan, down 52.29% year on year, and optical fiber export value was 1,734 million yuan, down 27.41% year on year; in May 2024, the export value of optical fiber prefabricated rods was 40.47 million yuan, down 58.73% year on year, and optical fiber export value was 410 million yuan, down 4.06% year on year. The weak performance of fiber optic cable exports is expected to be related to the overseas market inventory cycle. In the first quarter of 2024, Corning's optical communications business revenue was US$930 million, down 17% year on year and up 3% month on month; net profit was US$100 million, down 37% year on year and up 14% month on month. Corning said that as operator inventory returns to normal levels and customers resume procurement to support deployment rates, order volume is expected to increase. Carrier market sales are expected to increase from the first quarter, and AI data center contracts will also be converted into orders and revenue in 2024.
3. The company actively develops special optical fibers, air core optical fibers and other fields to lay out the future.
The company integrated and launched the i-Fibre series optical fiber, which has the characteristics of ultra-high capacity, ultra-low loss, ultra-low latency, integrated sensing, and environmental friendliness, which can fully meet the relevant needs of network development. Among them, the new generation G.654.E optical fiber has both a large effective area and a low attenuation coefficient, and supports backbone network transmission with large bandwidth, low latency, and long span. It is the preferred optical fiber for 400G, 800G and future Tbit/s ultra-high speed transmission technology, and has already achieved large-scale commercial use in domestic communication trunk upgrades and East Digital Western computing network construction. After years of independent R&D and market development, the company's G.654.E optical fiber has deployed nearly 2 million core kilometers around the world and has been successfully used in the construction of network infrastructure projects in China Mobile, China Telecom, China Unicom, the State Grid, and the Philippines and Brazil.
With the continuous development of application scenarios in the digital economy, artificial intelligence and other industries in the future, bandwidth and latency requirements will become more prominent. Networks are required to be able to provide 10 Gbps transmission rate and millisecond transmission delay. Space division multiplexing optical fiber and air core optical fiber are the two main technical routes for the next generation of mainstream optical fiber. The company actively lays out these new optical fibers and is at the leading level in R&D and commercialization. The company has taken on the subject of optical fiber preparation in the national key research and development plan for “Research on ultra-high capacity optical transmission systems based on air core optical fibers”.
4. Investment advice and profit forecast.
In the short term, demand for optical fiber cables is under pressure due to the decline in demand for optical fiber cables from domestic operators, high inventory cycles in overseas markets, and weak export performance. As the subsequent inventory cycle of overseas operators returns to normal levels, exports of optical rods and optical fiber cables are expected to pick up. In addition, the company actively lays out special optical fibers, air core optical fibers and other fields. G.654.E optical fiber has deployed nearly 2 million core kilometers around the world and has been successfully used in network infrastructure projects in many countries. We expect the company's net profit to be 11.02/12.65/1,459 billion yuan in 2024-2026, corresponding to PE of 16.9/14.7/12.7X, maintaining the “gain” rating.
5. Risk warning.
China Mobile's fiber optic cable purchases declined in 2023, and prices remained stable, but if demand continues to decline in 2024, it will be difficult for prices to maintain this level, and there is a risk that the company's gross margin will fall. The international conflict has intensified, leading to an increase in the prices of some commodities, affecting the company's gross profit margin. The company has been actively developing the international market for a long time, and overseas business revenue has increased rapidly. Most of the company's target markets are emerging economies and developing countries. The construction environment and level of construction are uneven, and some countries have risks such as politics, war, policy and economic fluctuations. At the same time, overseas countries' finance, laws, taxation, etc. are quite different from China, and large exchange rate fluctuations can also increase the complexity of overseas business.