Zhongtai Securities: Give Tianfu Communications a buy rating

Zhongtai Securities Co., Ltd. recently conducted research on Tianfu Communication and released a research report "Q1 performance year-on-year growth, high-speed optical devices drive growth", this report gives a buy rating to Tianfu Communication, the current stock price is 147.5 yuan.

Tianfu Communication(300394)

Investment Essentials

Announcement summary: The company released the 2023 annual report and the first quarter report of 2024, with revenue of 1.939 billion yuan in 2023, a year-on-year increase of 62.04%, and a net profit attributable to the parent company of 730 million yuan, a year-on-year increase of 81.14%. In 2024Q1, the revenue was 732 million yuan, a year-on-year increase of 154.95%, and the net profit attributable to the parent company was 279 million yuan, a year-on-year increase of 202.68%.

The performance is growing rapidly, and the volume of high-speed optical engine products is accelerating. In 2023, AI will bring about rapid growth in computing power demand, promote the construction of global AI computing infrastructure, and promote the innovation and development of the high-speed optical device market. In terms of products, optical passive devices achieved revenue of 1.183 billion yuan, a year-on-year increase of 23.28%, and a gross profit margin of 60.25%, an increase of 5.24 pct year-on-year, while optical active devices achieved revenue of 746 million yuan, a year-on-year increase of 242.52%, and a gross profit margin of 44.77%, a year-on-year increase of 8.02 pct. In terms of expenses, the sales/management/finance/R&D expense ratios were 0.93%/4.28%/-3.04%/7.37%, respectively, a year-on-year increase of -0.58/-0.99/-1.37/-2.91 PCT, respectively, and the company's expense control ability was good. The company's gross profit margin and net profit margin for the whole year of 2023 will be 54.30%, an increase of 2.68 pct year-on-year, and the net profit margin will be 37.65%, an increase of 3.80% year-on-year, mainly due to the optimization of revenue structure driven by the volume of 400G and 800G high-speed optical device products. 24Q1 revenue and profit were flat quarter-on-quarter, which is expected to be mainly due to the phased shortage of production capacity due to the flow of personnel during the Spring Festival, which has been significantly alleviated, and the quarter-on-quarter increase in expenses is mainly due to the provision of equity incentive expenses.

The iterative cycle of optical module upgrade is shortened, and the company's production capacity in Thailand is about to be put into use. AI drives a new round of growth of 800G, and in 2024, NVIDIA will release B-series chips such as GB200, which is expected to drive the deployment demand of 1.6T optical modules. In addition, Marvell also said that the iteration time for data transfer speed is decreasing, and the bandwidth rate will be doubled every two years in the future, with 2023 as the first year of AI. In terms of capital expenditure of overseas cloud giants, in 2023Q4, the total capital expenditure of Microsoft, Amazon, Apple, Meta and Google increased by 4.81% year-on-year to US$44.164 billion. The company is a leading enterprise in optical device products and solutions in China, and in the field of high-speed digital communication optical modules, supporting products mainly include optical engines and related optical device products, among which optical engines can be used for 800G/1.6 and higher speed digital communication optical modules, which is an important part of AI computing power. In terms of production capacity, the company accelerated the construction of an overseas headquarters platform in Singapore and a production base in Thailand. At present, the first phase of the Thai production base is expected to start trial production in May this year, and the layout of overseas production capacity is conducive to the company's comprehensive competitiveness in participating in global business. With the gradual use and ramp-up of the company's overseas production capacity, the future performance is expected to achieve sustained and rapid growth.

Continue to increase R&D investment to build an optical device platform company. In 2023, the company's R&D expenses will be 143 million yuan, a year-on-year increase of 16.74%, and the company will continue to maintain high-intensity R&D investment, and the number of R&D personnel will be 464, a year-on-year increase of 3.34%, of which 22.41% will be members under the age of 30. At present, the company's product core technical capability matrix layout is complete, and it has maintained innovation, exploration and leadership in the field of optical devices for a long time. At present, the company's main R&D projects include: Fiber Array device product development, Pigtail development for 400G/800G optical modules, development of optical devices for automotive lidar, development of special fiber devices for silicon photonic modules and single-channel high-power laser products, development of high-speed optical module wavelength division multiplexing miniaturized devices, etc. The optical engine is the core hardware of the CPO link, which is technically in line with the long-term development trend and is expected to strengthen the long-term competitiveness. Through high R&D investment, the company is expected to maintain strong market competitiveness in cutting-edge technology products. Based on the R&D team's professional accumulation in basic materials and components, optical design, integrated packaging and other fields, the company is actively expanding downstream lidar supporting new products relying on the existing mature optical device R&D platform in the optical communication industry. At present, the company has provided batch product delivery for some lidar manufacturers, and at the same time provided R&D sample verification for many customers with different technical routes at home and abroad, which is expected to create a second curve of business growth.

Investment suggestion: The company is the world's leading integrated solution provider of optical devices, with the scale construction of downstream data centers/intelligent computing centers, the demand for high-end optical modules such as 800G/1.6T is expected to continue to be released, which will drive the rapid growth of the company's active/passive business. At the same time, the company has made good progress in the field of lidar and is expected to create a second growth point, and we expect the company's net profit in 2024-2026 to be 1.270 billion yuan/1.909/2.549 billion yuan (1.211 billion yuan/1.624 billion yuan in 24-25 years), EPS of 3.22 yuan/4.83 yuan/6.46 yuan respectively, maintaining a buy rating.

Risk warning: the market demand for AI and data communication is lower than expected, the capacity expansion is less than expected, and the market competition is intensifying

According to the calculation of the research report data released in the past three years, the research team of Song Jiaji of Guosheng Securities has conducted in-depth research on the stock, with an average forecast accuracy of 87.08% in the past three years, and its forecast attributable net profit in 2024 is 1.304 billion yuan, and the predicted PE is 46.09 based on the current price.

The breakdown of the latest earnings estimates is as follows:

A total of 16 institutions have rated the stock over the last 90 days, with 14 having a buy rating and 2 having an overweight rating, with an average institutional price target of 166.28 over the last 90 days.

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