Performance grew rapidly in the first half of 2024, with AI driving a sharp increase in the company's profit margin over the same period: recently, the company released the 2024 interim report. During the reporting period, the company achieved revenue of 2.728 billion yuan, an increase of 109.07%, and realized net profit of 0.865 billion yuan, an increase of 200.02%; achieved a gross profit margin of 43.04%, an increase of 13.63 pcts, and a net profit margin of 31.72%, the same increase of 9.62 pcts. In a single quarter of 2Q24, the company achieved revenue of 1.615 billion yuan, a year-on-year increase of 129.23%, 45.11%, a net profit of 0.541 billion yuan, a year-on-year increase of 199.45%, and a 66.57% increase; a gross profit margin of 43.76%, an increase of 18.29pcts and 1.76pcts, achieving a net profit margin of 33.48%, an increase of 7.85pcts, and 4.32pcts. The increase in the company's revenue quality is mainly due to a significant increase in the proportion of high-speed optical module products. At the same time, the company has outstanding R&D capabilities. High-rate optical modules, silicon optical modules, coherent optical modules and 800G LPO optical modules have achieved major breakthroughs and progress. It is expected that as the company's recognition of high-speed optical modules in overseas markets gradually increases, the company's market share is expected to continue to increase, enabling the company's performance to continue the trend in the first half of 2024 and maintain long-term rapid growth.

Cloud vendors are growing healthily in capital expenditure related to artificial intelligence, and they are optimistic about the high growth in the digital communication side optical module market: Cloud vendors have maintained healthy growth in AI capital expenditure, driving the high growth of digital channel side optical modules. The rapid growth of Nvidia's data center business confirms the view that overseas cloud vendors are currently in a healthy state of AI capital expenditure and are more willing to invest in A1, driving a high growth in the optical module market. According to Lightcounting's forecast, the optical module industry is expected to grow 20% + in 2025, and will also maintain double-digit growth in 2026-2027, and the market space is expected to exceed 20 billion dollars by 2027. Among them, AI side digital transmission optical modules are expected to double in 2024, and this trend may continue from 2025 to 2026. As the core link of the industrial chain, optical module manufacturers have their own production capacity advantages and technical advantages after the launch of next-generation products. Currently, Chinese manufacturers invest more in R&D and have the highest market share in the world, and the market recognition of China's optical module and optical engine related manufacturers is high. It is expected that as cloud computing vendors continue to invest in the AI side, Chinese manufacturers are expected to grow on the basis of maintaining their current market share. The revenue quality of related manufacturers is expected to improve further, and the company's overseas customer expansion is expected to continue.

Investment advice: We believe that as the development of AI boosts the demand side, the company, as an industry leader, is expected to continue to benefit from the high growth of the industry. We predict that in 2024/2025/2026, the company will achieve revenue of 6.408/13.218/17.959 billion yuan, an increase of 106.87%/106.28%/35.86%; EPS is 3.07/5.65/7.49 yuan respectively, corresponding to 2024/2025/2026 PE is 28.90/15.68/11.83 times, respectively. Considering the company's leading position in the digital communication business and core competitiveness of technology, and expectations for future customer development, we maintain the “recommended” rating for the company.

Risk warning: Risk of AI development falling short of expectations, risk of introducing new products falling short of expectations, risk of R&D progress falling short of expectations, risk of increased industry competition, etc.