Event: On October 29, 2024, the company released its third quarter 2024 report. Revenue for the first three quarters of 2024 was 0.178 billion yuan, up 91.20% year on year; net profit to mother was -0.001 billion yuan. Q3 revenue in a single quarter was 0.058 billion yuan, up 81% year on year, down 3.46% month on month, and net profit to mother - -0.011 billion yuan.

Revenue is growing rapidly, and we are waiting for Digital Communications to improve profitability. 2024Q3's revenue was 0.178 billion yuan, up 91.20% year over year; net profit to mother was -0.001 billion yuan. Q3 revenue in a single quarter was 0.058 billion yuan, up 81% year on year, down 3.46% month on month, and net profit to mother - -0.011 billion yuan. Profit pressure is still high on the telecom market and the wireless side of optical chips. The contribution of CW light sources has not yet been formed, and we are waiting for digital communication demand to drive performance.

Profitability is temporarily under pressure, and increased R&D investment is expected to improve the product structure. Net profit margin for the first three quarters was -0.31%, down 23.32pct year on year; gross margin was 29.69%, down 9.36pct year on year, and sales/management/ R&D expense ratios were 4.51%/10.07%/20.22%, respectively, down 0.21/10.84/4.07pct year on year. Q3 Net profit margin for the single quarter was -19.48%, down 19.84pct; gross margin was 21.98%, down 10.01pct; sales/management/R&D expense ratios were 7.15%/11.16%/24.08%, respectively, up 4.32/1.77/2.28pct. The decline in net profit margin due mainly to: 1) shipments of negative gross margin products such as 2.5G are relatively high, and gross margin has declined, and accrued inventory impairment has increased as product price competition intensifies; 2) the company continued to increase R&D investment in high value-added products such as EML and silicon light in order to respond positively to the intensification of market competition for medium- and low-rate products; 3) the company received a year-on-year decrease in government subsidies and financial management income.

Continuing high investment in R&D, the company gradually developed into a leading domestic supplier of optical chips. The total R&D investment of 2024Q3 was 36.022 million yuan, an increase of 59.18% over the previous year. In particular, the company increased investment in technology and equipment related to products such as high-speed optical chips and high-power optical chips. After years of R&D and industrialization, the company has established an IDM full-process business system including chip design, wafer manufacturing, chip processing and testing. It has multiple production lines covering MOCVD epitaxial growth, grating technology, optical waveguide production, metallization processes, end surface coating, automated chip testing, high frequency chip testing, and reliability testing and verification. The company will continue to be deeply involved in the optical chip industry and strive to become a world-class supplier of optoelectronic semiconductor chips and technology services.

Investment suggestion: 2024Q3 accounts for a relatively high share of negative gross margin product shipments, leading to a decline in gross margin dragging down performance. As the industry recovers, the company continues to increase R&D investment in high value-added products such as EML and silicon light. The product structure is expected to improve, and performance recovery is expected. We lowered the company's profit forecast. We expect the company to achieve operating income of 0.234/0.347/0.504 billion yuan in 2024/25/26, an increase of 62%/48%/45% year on year; net profit to mother of 0.013/0.053/0.115 billion yuan, up -34%/310%/117% year on year. Maintain an “overweight” investment rating.

Risk warning: Demand in the field of AI and digital communication falls short of expectations, market competition increases risk, and risk of international trade disputes.