The company is a leading domestic commercial Ethernet switching chip company, and high-end products are catching up with major international manufacturers. In the context of domestic replacement of Ethernet switching chips and the expansion of data centers, I am optimistic that the company's performance will turn loss into profit as the industry boom improves. Covered for the first time, an increase in holdings rating is given.

Key points to support ratings

Domestic commercial Ethernet switching chips and equipment leader. Since its establishment in Suzhou in 2005, Shengke Communications has been committed to the development and production of Ethernet switching chips, focusing on core chips for enterprise networks, operator networks, data center networks and industrial networks. The company gradually expanded from initial small-scale production to production capacity with global market influence, and launched various major products such as CTC7132, CTC8096, and CTC5160. Shengke Communications products not only meet the high standards of various network environments, but have also won wide recognition from the industry through continuous technological innovation and quality improvement, and their product quality and technical level have achieved a consistent reputation in the global market. Shengke Communications products have been certified as “internationally advanced, partly internationally leading” by the China Electronics Society.

AI accelerates the expansion of data center demand, and Ethernet switching chips may welcome incremental space. As generative AI applications become more and more abundant, the amount of data brought about by large model training and inference has increased dramatically, driving the demand for high bandwidth and low latency in data center networks. As the core equipment of data center networks, switches have also ushered in new technological changes and growth opportunities. According to IDC forecasts, the global data center switch market continues to expand, and its growth rate exceeds the overall market. The sales volume is expected to reach 20.88 billion US dollars in 2024, accounting for more than half of the overall market share, becoming one of the main application markets for switches, and switch chips as core components may usher in incremental space.

High-end products have an absolute voice overseas, and the time is right for the company to break through in new categories. The company closely follows the development trend of the world's leading Ethernet switching technology, grasps the trend of the industry and closely follows market leaders to expand its product layout. Currently, the company's main Ethernet switching chip products cover 100Gbps to 2.4Tbps switching capacity and 100M-400G port speed, and have been used on a large scale in enterprise networks, operator networks, data center networks and industrial networks. The Arctic series, a high-performance switching product with a maximum switching capacity of 25.6 Tbps in the data center field, is in trial production for hyperscale data centers.

valuations

According to the increasing share of the company's Ethernet switching chip business, we expect the company to achieve revenue of 1.286/1.832/2.206 billion yuan in 2024/2025/2026, corresponding market sales rates of 13.45/9.44/7.84 times, respectively, which is lower than the industry average. The company's business has a first-mover advantage in the domestic market. At the same time, the performance of advanced and high-end chip products under development may catch up with global industry leaders, and should enjoy a certain valuation premium. Covered for the first time, a “gain” rating was given.

The main risks faced by ratings

Market competition intensifies, product development falls short of expectations, market expansion falls short of expectations, supplier concentration is high, and customer concentration is high.