Key points of investment

Summary: The company announced its results for the first three quarters of 2024. Revenue for the first three quarters of 2024 was 2.39 billion yuan, +99%, net profit to mother 0.98 billion yuan, +122% year over year; looking at the quarterly breakdown, 24Q3 company's revenue was 0.84 billion yuan, +55% year over year, and net profit to mother 0.32 billion yuan, +59% year over year.

Paragraph synopsis:

Benefiting from high demand for downstream high-speed optical modules, the company's revenue scale increased year-on-year. The product structure and gross margin also increased 5.3 percentage points year-on-year in the first three quarters of 24, and gross margin reached 59.0% in the 3rd quarter of '24, +3.7 percentage points year over year, and -0.7 percentage points month-on-month. Considering factors such as exchange rate changes and dynamic product shipments, we believe that this quarter's gross margin is in line with expectations.

Affected by fluctuations in the US dollar and RMB at the end of September, fluctuations in the book value of the company's foreign exchange assets at the end of the quarter caused the company's financial expenses to increase from -0.04 billion yuan in the previous quarter to 0.02 billion yuan in the current quarter, and the financial expenses ratio also increased 6.6 percentage points to 2.1% month-on-month.

We believe that although short-term factors such as exchange rate fluctuations and dynamic changes in the delivery pace of downstream customers have had a certain impact on the company's performance in the current quarter, the company's performance will continue to benefit from the expansion of downstream computing power demand and achieve growth as customers release 1.6T products and the company's production capacity is implemented one after another.

The company's passive and active products will benefit from subsequent demand expansion and technological development. We believe that next year's industrial demand will have the following trends: 1) Under the triple trend of highlighting inference demand+ power card supply expansion+self-built Ethernet structure iteration, demand for 800G will be fully released next year; 2) Nvidia will continue to maintain the advantages of integrating software and hardware systems in training and training, while continuing to optimize its own customer structure, which will further lead the iteration and application of cutting-edge products such as 1.6T; 3) Silicon optical modules have the following trends in reducing the shortage of materials such as optical chips and undertaking common silicon-based packaging trends Three levels of cost reduction Industrial logic is expected to accelerate penetration. At the same time, the prospects for CPO applications are gradually showing, and it is expected that technology will gradually be implemented and industrialized applications will begin in the future

As a high-quality supplier of upstream core components for optical modules, the company is deeply tied to major customers. We believe that the company's binding to leading downstream manufacturers will benefit from next year's 800G and 1.6T volumes, as well as the long-term penetration trend of CPO.

Profit forecast and investment rating: The company's passive active business is developing on both lines, and undertakes strong demand related to computing power from mainstream downstream customers. We maintain the company's 2024/2025/2026 net profit forecast of 1.43/2.27/2.72 billion yuan. The closing price on October 24, 2024 corresponding PE was 50.3/31.6/36.4 times, respectively, maintaining a “buy” rating.

Risk warning: demand for high-speed optical modules falls short of expectations; customer development and share falls short of expectations; product development and implementation falls short of expectations; industry competition intensifies; supply of raw materials is scarce.