Investment Rating - The investment rating for the company is "Recommended" (maintained) with a target price of 141 CNY per share [1]. Core Views - The company has seen a significant improvement in gross margin in Q2, with high-end flagship chips gradually entering the application stage. The overall gross margin reached 46.70%, an increase of 9.24 percentage points year-on-year [6][7]. - The company reported a revenue of 5.08 billion CNY in the first half of 2025, a decrease of 4.56% year-on-year, and a net profit attributable to shareholders of -0.24 billion CNY, indicating a reduction in losses [3][6]. - The company is focusing on high-end product lines, with products covering a range of switching capacities from 100Gbps to 25.6Tbps, and is well-positioned to benefit from the growing demand in the AI and data center markets [6][7]. Summary by Sections Financial Performance - In Q2 2025, the company achieved a revenue of 2.85 billion CNY, a year-on-year increase of 2.53% and a quarter-on-quarter increase of 27.78%. The net profit for the quarter was -0.08 billion CNY, showing an improvement of 83.29% year-on-year [6]. - The company’s gross margin and net margin for Q2 were 48.77% and -2.98%, respectively, reflecting a year-on-year increase of 11.74 percentage points and 15.31 percentage points [6]. Revenue and Profit Forecast - Revenue projections for 2025-2027 are adjusted to 12.75 billion CNY, 17.14 billion CNY, and 21.98 billion CNY, respectively, with corresponding price-to-sales (P/S) ratios of 45.3X, 33.7X, and 26.3X [7]. - The company is expected to achieve profitability by 2026, with a projected net profit of 60 million CNY and 125 million CNY in 2027 [8][9]. Market Position and Strategy - The company is recognized as a rare Ethernet switch chip design enterprise in China, with a rich product lineup targeting the mid-to-high-end market. The demand for high-speed network communication devices is expected to rise due to the explosion of the AI industry [6][7]. - The company is benefiting from the trend towards domestic production and has established a first-mover advantage in the market, which is expected to enhance its market share in the future [7].

Summary of Conference Call Notes Industry Overview - The conference call discusses the advancements and opportunities in the AI chip interconnect market, particularly focusing on the transition from traditional server interconnects to more advanced solutions like NVSwitch and Ethernet-based technologies [1][4][5]. Key Points and Arguments 1. **AI Chip Interconnect Technologies**: - Traditional server interconnects utilize NVSwitch, while newer solutions like NV72 connect 72 GPUs through Server/Switch tree structures, simulating a single server [1]. - Various technologies are being explored, including NVSwitch, Solidus, custom UB switches, and Ethernet switching chips [1][4]. 2. **Market Dynamics**: - Ethernet is becoming a dominant player due to its open ecosystem and high standardization, which contrasts with proprietary solutions like NVSwitch [5][6]. - The Brocade SUE standard aims to facilitate efficient communication between GPUs, leveraging Ethernet technology to reduce latency and improve compatibility [2][8]. 3. **Performance Metrics**: - Brocade's Tomahawk Ultra switch achieves a latency of 200-250 nanoseconds, outperforming NVSwitch's 300 nanoseconds [22][14]. - The SUE technology combines memory and message semantics to enhance data transfer efficiency between CPUs and GPUs [10][11]. 4. **Product Development**: - Alab has introduced PCIe retimer and switch products, entering the PCIe 6.0 domain, although current speed limitations restrict GPU-to-GPU communication [7]. - Brocade's SUE standard is designed to handle data formats and semantics effectively, making it crucial for scale-up operations [8][10]. 5. **Comparative Analysis**: - The SUE standard is positioned as a more flexible and efficient alternative to NVSwitch, with a focus on reducing latency through various innovative techniques [14][15]. - The Matrix 384 system from Huawei utilizes a UB chip for direct CPU-to-GPU communication, expanding the definition of scale-up beyond traditional GPU-to-GPU connections [9][19]. Additional Important Content 1. **Market Segmentation**: - The scale-up switch market is primarily concentrated in AI networks, with significant deployments expected in North America and China [23]. - North America is dominated by major players like NVIDIA, AMD, and Intel, while China is seeing rapid advancements from companies like Cambricon and Kunlun [24]. 2. **Technological Standards**: - The current standard for Ethernet chips is 400G, designed to accommodate multiple connections for GPUs and other devices [25]. - Domestic companies are developing high-performance switches, but there is a gap in ultra-low latency solutions compared to Brocade's offerings [27][29]. 3. **Challenges and Future Outlook**: - The transition from scale-out to scale-up technologies requires significant advancements in production capabilities and technology validation [29]. - The complexity of using multiple protocols within systems like Huawei's Matrix 384 highlights the need for unified standards like SUE to simplify operations [20][21]. 4. **Pricing Trends**: - The price of Brocade's first-generation scale-out switches has decreased from $8,000 to around $6,000, while the latest scale-up models exceed $10,000 [32]. This summary encapsulates the critical insights from the conference call, highlighting the evolving landscape of AI chip interconnect technologies and the competitive dynamics within the industry.