SUZHOU TFC OPTICAL COMMUNICATION(300394)：WITH PLATFORM-BASED LAYOUT OF PASSIVE & ACTIVE OPTICAL DEVICES TFC FULLY BENEFITS FROM WAVE OF AI COMPUTING INFRASTRUCTURE CONSTRUCTION

　　Investment Thesis
TFC is a leading provider of comprehensive optical device solutions in the industry, with steady performance growth and stable profitability at a relatively high level. TFC has been specializing in the optical device industry for over a decade and has built a series of products in the passive and active optical device category. The company's revenue for 2022/23H1 reached RMB1.2bn/660mn, with yoy growth of +15.9%/+15.0%. And it reported NP for 2022/23H1 of RMB400/240mn, with yoy growth of +31.5%/+36.4%. The company's product prices increased steadily, and its GPM & NPM stabilized around 50%/30% in recent years.
AI computing infrastructure construction has become a significant expense item for U.S. cloud providers and is likely to see sustained growth. In their latest conferences, the four major U.S. cloud providers emphasized their continued focus on building AI computing facilities. Though in the short term, capital expenditure by companies like Google, Meta, and Amazon did not meet expectations due to delays in equipment delivery and slowdowns in logistics platform construction, from a long-term perspective, AI computing expenditure is likely to see both overall and structural growth.
Optical devices are a critical component in optical communication/optical modules, and the market size is likely to rapidly expand with the growth of AI computing infrastructure construction. According to OpenAI, AI computing power grew tenfold annually from 2012 to 2018, and while the growth rate will gradually slow down, it still far exceeds Moore's Law. Huawei predicts that global AI computing power will exceed 105ZFLOPS (FP16 precision) by 2030, with a growth of 500 times from 2020 to 2030. Meanwhile, IDC predicts that China's AI computing power will increase from 268EFLOPS in 2022 to 1271EFLOPS in 2026, with a CAGR of 47.6%. With the background of AI computing power surge, the rapid demand growth of data transmission hardware related to optical devices is an inevitable trend. We estimate that by 2030, in various scenarios, cumulative market size for AI computing-related optical devices could exceed USD27bn.
The company steadily built its optical device product platform and is likely to fully benefit from the AI wave. TFC continues to invest heavily in R&D, accumulating high- quality products and enjoying top-tier industry GPM. Meanwhile, the company is gradually expanding its strategic product portfolio through self-development and fund- raising, equity acquisitions, and other methods, positioning itself early for potential trend products such as high-speed optical engines to meet downstream customer demand for high-speed optical modules, highly-integrated optical engines, and high-speed optical devices, and is likely to benefit comprehensively.
　　Earnings Forecast & Rating: We expect its NP in 2023-2025 to be RMB0.52/0.72/1.03bn (+28.3%/+39.7%/+42.8% yoy), implying P/E at 61.0x/43.7x/30.6x.
　　Risks: Lower-than-expected demand of high-speed optical devices, customer expansion & market share, and product development & implementation, intensified competition.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。