Recently, public funds have disclosed their positions one after another, and new faces have finally emerged among the top ten heavy positions.

Among the equity-oriented funds, Zhongji Xuchuang not only ranked sixth among the top ten heavy positions, but also became the stock with the largest amount of added positions in the second quarter, reaching 10.54 billion yuan. However, Xin Yisheng, a younger brother who also specializes in optical modules, added positions only about 1/4 of that of Big Brother.

Although the latter's doubling this year is even more attractive, the aesthetics of public funds have given practical answers.

In the past two years, the CPO track has been praised by the market. The market value of Zhongji Xuchuang, the core dragon, has soared several times. It seems that it has begun to "overcome the cold at high places". However, why do institutions continue to pursue it crazily in the second quarter?

01

Zhongji Xuchuang currently has a market value of about 150 billion yuan, a year-to-date increase of 66.27%. In the second quarter of this year, the fund company's shareholding in it increased from 1.75 billion shares to 2.59 billion shares, accounting for 23.21%.

Being able to be valued by institutions even though it has tripled last year is inseparable from the company's performance fulfillment potential as an industry leader and being able to absorb more orders.

On July 15, Zhongji Xuchuang announced its first-half results forecast. Thanks to the release of demand for downstream AI tracks, the company's profits maintained a high growth trend.

Specifically, it is expected that the parent net profit range in the first half of the year will reach 2.15 billion yuan-2.5 billion yuan, a year-on-year increase of 250.30%-307.33%. The calculated median net profit is 2.325 billion yuan, and the net profit after adding back the corresponding equity incentives will reach 2.243 to 2.593 billion yuan.

The main reason for the growth is reflected in the product structure. The demand for high-speed products such as optical modules 800G continues to increase, driving rapid growth in performance.

For this achievement, the market has actually long expected it.

Because 400G and 800G are currently mainstream products on the market, the company has benefited from the rapid growth in the proportion of shipments of high-end products such as 400G/800G, and the product structure has continued to be optimized, allowing the company's gross profit margin and net profit margin to be significantly improved.

The organization attaches more importance to Zhongji Xuchuang's logic. Zhongji Xuchuang is currently at the forefront of the iteration of high-speed optical modules into mainstream products. Moreover, as products above 800G begin to gradually increase in volume in the second half of the year and transition to 1.6T, the demand has not yet been finalized.

The company has a first-mover advantage in its 800G and 1.6T product portfolios. It not only combines multiple architecture solutions, but also makes forward-looking arrangements in technologies with higher cost performance such as silicon optics and CPO. As cloud computing manufacturers enter the deployment cycle above 800G next year, Zhongji Xuchuang will naturally enjoy the high premium advantage of the new product cycle.

The company revealed in the survey that it still maintains its expectation that 1.6T products will be shipped in the fourth quarter of this year and will be heavily increased next year. The company previously provided guidance of about 5 million yuan, but no adjustments have been made so far. In the industrial chain of China Taiwan, shipment expectations for GB200 are relatively optimistic, which suggests that there is still room for upward adjustment in 1.6T products.

According to brokerage forecasts, global demand for 800G units will exceed 16 million units in 2025, and 1.6T demand will exceed 5 million units. The demand for 800G next year will benefit from the increased volume of CSP's self-built Ethernet inference network, and the 1.6T will benefit from the increased volume of Nvidia B-series chips.

By the second half of the year, the company's valuation will gradually be factored into the imagination of next year's results.

The excellent performance so far and the prosperity of the track have given institutions a more optimistic forecast for profit growth next year. Several brokerages have even sold a net profit of nearly 10 billion yuan, which has compressed the 25-year P/E ratio to about 20 times.

Based on the current P/E ratio of nearly 51 times, it is conceivable that if this valuation level continues to be maintained next year, there is hope that the market value will double again.

However, for ordinary investors who are concerned about investment opportunities in optical modules, since the current track prosperity is the prerequisite supporting its valuation, whether Zhongji Xuchuang can continue to realize its potential in the future, or new challengers will continue to narrow the gap., and whether the company can maintain the pricing power of optical modules is a question worth considering.

02

Since the beginning of 2023, the cumulative growth rates of Zhongji Xuchuang, Xinyisheng and Tianfu Communications have all ranged from 450% to 650%, and are called the "Three Musketeers" of optical modules by investors. This year, the quarterly results of the Three Musketeers have been growing month-on-month, confirming that the industry is indeed improving marginally.

AI's business model has not yet formed a closed loop, but several major technology giants such as META, Google, and Tesla are increasing their investment in computing power capital expenditures for fear of falling behind in the wave of technology. Coupled with new forces such as Open AI, this has led to a tightening of production capacity from Nvidia Computing Card to the entire data center industry chain.

The investment cycle has just begun. From this perspective, there is no need to worry about the performance of the Three Musketeers in at least 2025.

According to Lightcounting's forecast, the global market size of optical modules will maintain growth at a compound growth rate of 11% from 2022 to 2027, and is expected to exceed US$20 billion in 2027.

Among them, data-pass optical modules are the key to increment. The driving force of data-pass optical modules for AI mainly comes from the demand for 800G, 1.6T, and 3.2T optical modules. By 2027, the market size of optical modules with speeds of 800G and above in the entire Digital Communication market will exceed 50%.

Because the development of AI has shortened the iteration cycle of optical module products, profits can only flow to leading manufacturers with fast technological progress and advanced production capacity can be supplied.

On the one hand, high speeds require rapid upgrades under the requirements of AI applications. Before 2023, it would take about four years to double the optical module speed; now, the intergenerational upgrade from 400G to 800G to 1.6T is expected to be shortened to two years.

On the other hand, the number of optical connections and the proportion of AI chips are also continuing to increase. As long as the Scaling Law is still effective, as the model scale increases, the number of optical modules that need to be matched will also increase. Nvidia released a future product roadmap at the Computex conference on June 3, pushing AI chips to a one-year iteration cycle. Supporting optical modules are also expected to quickly upgrade from 800G to 1.6T and 3.2T, while introducing LPO, silicon light, CPO and other different solutions.

As the product selection cycle becomes shorter and product technical barriers increase, benefiting leading manufacturers with outstanding technical capabilities, the industry structure is expected to continue to be concentrated. According to Lightcounting, Zhongji Xuchuang's market share has increased rapidly in the past 10 years. In 2023, the company will surpass Coherent to occupy the first place in the global optical module market.

Industry demand is becoming more and more certain, and the market's attention to optical module manufacturers has shifted from technology and customer binding relationships to production capacity and shipping rhythm.

The most obvious thing is the divergence in the trend of individual stocks in the optical module sector since the second half of last year. Only the Three Musketeers who can produce results can continue to rise significantly this year.

Zhongji Xuchuang's production capacity layout enables it to ship large quantities of high-end optical modules. The company has production bases in Suzhou, Tongling, Chengdu, Thailand and China Taiwan.

Among them, in order to increase shipments to overseas customers and prepare for the volume of products such as 800G and 1.6T, the company's Thai factory has increased capital expenditures since the second half of last year and continues to expand production capacity.

Against the background of the scientific and technological game among major countries, the importance of overseas production capacity to business security is self-evident.

At the beginning of the month, regarding Trump's post-election trade policy proposition that was fermented in A-shares, even the optical module was not spared. Investors began to worry about whether the wind of tax increases would blow to the optical module after Trump was elected, giving overseas competitors bring opportunities, and the pricing of optical modules will bring challenges.

This concern has not yet had a strong impact. Although tariffs may be a foregone conclusion, optical modules still have the characteristics of shortage of production capacity. Only the Three Musketeers have enough technical processes and production capacity to keep up with the pace of the AI industry. If there were really no barriers to high-speed optical modules, domestic second-tier manufacturers would not be unable to get Nvidia orders, and the United States would not take the initiative to choke itself.

According to Zhongji Xuchuang's announcement and investors 'questions and answers, its proportion of Thailand's production capacity is expected to reach or exceed 50%, and is expected to increase further.

Finally, there is the impact of price on profit margins.

Combined with the price trends of previous generations of products, the price of each generation of optical modules has dropped significantly year-on-year during the initial mass production stage, and has stabilized subsequently. If there is a serious price reduction, the gross profit margin of the main business will be affected, and profits may not meet market expectations.

Therefore, head manufacturers have been committed to the use of silicon optical technology. Silicon optical solutions have high integration and have good performance in terms of speed, energy consumption, cost, etc., and have low cost in short-range scenarios and coherent optical scenarios exceeding 400G. cost advantage.

Coupled with the low labor costs of Southeast Asian production capacity, even if prices are lowered downward, due to savings in material costs and process links, it is expected that profits will be better retained as silicon optical products continue to increase in the revenue structure.

Zhongji Xuchuang is relatively optimistic about the silicon optical business and revealed that it plans to give priority to shipping silicon optical products in the future. The overall production capacity will improve next year, and expects the proportion of silicon optical products to reach more than 70%.

03

Just looking at the six-fold increase of this heavy position stock in the past two years is indeed scary. However, if the forecast of high profit growth in 2025 is included, the valuation will become about 20 times. Similarly, Xinyisheng is 32 times and Tianfu Communications is 24 times.

Generally speaking, the general valuation of high-end manufacturing is 20-25 times, so although Zhongji Xuchuang's current valuation level is small, it is not considered to have been hyped up.

However, the biggest problem is that the current market environment is not a "general situation". The market is not very friendly to the valuation of any individual stock. No matter how good the company's valuation is, it will be discounted. Zhongji Xuchuang will not be an exception.

At the same time, don't forget that the key prerequisite for track stocks is always prosperity. If the subsequent computing power construction of downstream customers fails to meet expectations, or competition is introduced into the core customer supply chain, resulting in a significant reduction in prices, it may lead to a slowdown in the performance of optical module manufacturers, resulting in a double kill of "performance and valuation". Therefore, even the most bullish investors should always pay attention to the risks of investment fluctuations. (End of the full text)