Revenue increased year on year in Q3 2022, net profit increased month-on-month, and the company's performance improved marginally. Recently, the company announced that in the first three quarters of 2022, the company achieved revenue of 8.071 billion yuan, an increase of 3.45% over the previous year; net profit of Fumo was 351 million yuan, an increase of 20.42% over the previous year; net profit after deducting non-return mother's net profit was 306 million yuan, an increase of 44.00% over the previous year.

2022Q3, the company achieved revenue of 2,876 billion yuan in a single quarter, an increase of 3.76% over the previous year; net profit of Guimo was 160 million yuan, an increase of 66.91% over the previous year; net profit after deducting non-return mother was 130 million yuan, an increase of 55.25% over the previous year, and performance increased rapidly. In the first three quarters, the company's comprehensive gross margin was 12.77%, an increase of 1.37 percentage points over the same period last year; the net interest rate was 5.55%, an increase of 2.09 percentage points over the same period last year. The company's exchange earnings for the third quarter of 2022 had a positive impact on the company's performance. Overall, the company's traditional business stabilized, innovative business continued to gain strength, and future performance is expected to maintain a high growth trend.

The certification of the automotive electronics business has contributed to high performance growth, and Vietnamese factories are expected to accelerate their gross margin.

The company focuses on the manufacture of communication network equipment, mainly OEM manufacturing. It has three major production bases in Taicang in the Yangtze River Delta, Shenzhen in the Pearl River Delta, and Vietnam. It is based in East Asia and aims to be global. Currently, the company's domestic and overseas business accounts for half of its revenue. The company's business is mainly divided into three levels, with a mature, growing, and two emerging major businesses: 1) Communication terminal business (mature): including Netcom business and Digital Communications business. Among them, the Netcom business includes wired broadband (DSL terminals), optical access (PON terminals), wireless and mobile terminals (enterprise networks, WI-FI devices). The digital communication business is mainly developing various types of switches such as 100Mbit/gigabit unmanaged Ethernet switches, data center switches, etc., while actively developing various types of switches in new fields such as servers to optimize the company's communication product structure; (2) Mobile communication business; Growth): Including the 5G small base station communication business and its subsidiary Wenyuan Communications. Among them, in the small base station business, the company focused on projects such as 5G enterprise stations, 5G+PON household stations, and launched a series of 5G integrated prototypes to continue to increase cooperation in coal, transportation and other industries; the subsidiary Wenyuan Communications focuses on 5G solutions for public security systems, providing intelligent surveillance, autonomous patrol vehicles, VR anti-fraud education, and various urban management platforms. The company uses its own brand to directly sell ToB, which is greatly influenced by government procurement requirements; 3) Sensor sealing business (Xinxing 1): The company set up a subsidiary Shanghai Microelectronics last year to focus on advanced sensor packaging, testing and application. It has now achieved sensor wafer-level and FT-level testing. The products cover categories such as mechanics, optics, acoustics, radio frequency, biology and microfluidic control, closely following the domestic substitution trend; 4) Automotive electronics business (Xinxing 2): Mainly includes smart cockpits, domain controllers, lidar and other products. It has now completed trial production and obtained 16949 certification, and is qualified to become a Tier 1 supplier. The company's main business has moved to Vietnam. The vacant factory in Taicang can meet the demanding quality requirements of automotive electronics through simple transformation, provide OEMs with rare stable production capacity, and have strong bargaining power, which is expected to increase the gross profit margin of automotive electronics products. At the same time, the company is speeding up the progress of plant relocation and new business plant renovation in Vietnam. Through cost reduction, gross profit margin is further improved, and further marginal improvements are expected throughout the year.

Deepen supply chain management to effectively expand new businesses, and domestic and overseas markets expand simultaneously, and business performance is expected to increase.

As a leading global foundry, the company has close ties and good cooperation with chip suppliers, and has strong supply chain management capabilities, creating favorable conditions for the company to expand automotive electronics production capacity. The company is deeply involved in overseas markets. While building factories in Vietnam and other cost depressions, it cooperates closely with overseas telecommunications giants such as Nokia. We are optimistic about the company's future growth. Combined with performance such as 202Q3, we gave the company 202E-2024E net profit forecast values of 4.19, 502, and 613 million yuan, corresponding EPS of 0.53 yuan, 0.63 yuan, and 0.77 yuan, and corresponding PE of 17.34 times, 14.47 times, and 11.87 times, giving a “recommended” rating.

Risk warning: the impact of the global pandemic and uncertainty in foreign policies; exchange rate fluctuations; risk of fluctuations in raw material prices; risk of declining gross profit due to fierce market competition.