There was a month-on-month improvement, and the acquisition of RFS contributed to non-recurring revenue

In the first half of the year, the company achieved operating income of 5.348 billion yuan, a year-on-year decrease of 23%, and net profit to mother of 0.378 billion yuan, a year-on-year decrease of 38%, after deducting non-net profit of 0.12 billion yuan, a year-on-year decrease of 79%. The 2Q quarter achieved operating income of 2.961 billion yuan, a year-on-year decrease of 20%, net profit of 0.32 billion yuan, a year-on-year decrease of 13%, after deducting non-net profit of 95.46 million yuan, a year-on-year decrease of 71%, and achieved two consecutive quarters of month-on-month growth since 4Q23. The decline in the company's performance was mainly due to pressure from domestic and foreign communication market demand, and revenue from ordinary fiber optic cable-related products declined compared to the same period last year; non-recurring revenue was mainly due to capital gains of 0.194 billion yuan from acquisitions of RFS Germany and RFS Suzhou.

Demand for fiber optic cables is under pressure, but demand for data centers continues to increase

In the first half of 2024, traditional optical fiber optic cable products faced the challenge of insufficient effective demand and the conversion of old and new development momentum. As a result, global fiber optic cable industry demand continued to be under pressure from the second half of 2023. However, the market demand for G.654.E optical fiber for communication backbone upgrades and long-distance data center interconnection, as well as multi-core, low-mode, and space-division multiplexing optical fibers to improve transmission capacity continued to accelerate.

Increased share of revenue from high-margin products

By product: 1) Optical fiber and prefabricated rod revenue was 1.279 billion yuan, down 31% year on year; 2) optical cable revenue was 1.93 billion yuan, down 29% year on year, and the share of ordinary optical cable products won the bid and delivery share in the domestic operator market was leading the industry; 3) revenue from optical devices and modules was 0.54 billion yuan, a decrease of 40% year on year; 4) revenue from other products and services was 1.599 billion yuan, up 12% year on year. The overall gross profit margin in the first half of the year was 27.9%, up 1.8 pct from the previous year. The rapid increase in revenue from new optical fiber products with high gross margins, such as high-end multi-mode optical fiber used within data centers and G.654.E optical fiber used for long-distance interconnection between data centers, had a positive impact on the company's gross margin level in the first half of the year.

Continue to implement an international and diversified layout

Overseas revenue was 1.77 billion yuan, accounting for 33% of revenue. Optical cable production capacity in Mexico has now entered the trial production stage. Production capacity in Poland and Indonesia has been smoothly expanded, and acquisitions of RFS Germany and RFS Suzhou have also been completed. Diversified business revenue is about 2.14 billion yuan, accounting for 40% of revenue. The diversified layout has achieved remarkable results. Changfei Advanced Semiconductor is expected to go through mass production in July '25. After completion, it will become one of the silicon carbide device factories with the largest production capacity and the most advanced technology in China. Changfei Guangfang laser shipments and sales revenue will continue to grow, and submarine cable manufacturing and engineering construction will continue to explore the market.

Profit forecasting and investment advice. Due to the decline in non-profit in the interim report, we lowered our forecast. The net profit due to the 2024-2026 is 0.591 billion yuan, 0.643 billion yuan, and 0.785 billion yuan, respectively (the original forecast was 1.233 billion yuan, 1.352 billion yuan, and 1.508 billion yuan), and the rating was downgraded to “increase holdings.”

Risk warning: operators' demand for optical fiber cables falls short of expectations; the supply and demand pattern deteriorates due to competitors' expansion of production capacity; operating results fall short of expectations due to innovative businesses in the early stages of development.