2Q24: Demand for downstream applications picked up, and Huahong Match's net revenue boosted profit 2Q24 to achieve revenue of 0.267 billion yuan (yoy: +54.02%, qoq: +8.18%), a record high for the same period since listing. Net profit due to mother 0.092 billion yuan (yoy: +118.24%, qoq: +79.82%), net profit of non-return mother 0.079 billion yuan (yoy: +180.25%, qoq: +19.06%). As demand for downstream applications picked up and the company continued to strengthen product promotion, the company achieved rapid year-on-year growth in SPD, NOR Flash, and automotive-grade EEPROM shipments in the first half of the year, and sales of industrial-grade EEPROM and voice coil motor driver chips also grew rapidly. Gross margin and expenses remained stable in 2Q24. Net income from changes in fair value was 11.26 million yuan (mainly distributed by Huahong), which led to an increase in net profit margin of 13.68 pcts month-on-month to 34.35%. We expect net profit to be 0.365/0.529/0.729 billion yuan for 24/25/26. It will take some time to consider the release revenue of new products. We will give 33 x 24PE (comparable to the 38 x 24PE expected by the company Wind 1), and the target price is 75.9 yuan, maintaining the “buy” rating.

2Q24 review: DDR5 SPD sales increased month-on-month, NOR sales doubled, 2Q24's revenue increased by a single digit month-on-month, mainly due to increased DDR5 penetration rate, and DDR5SPD shipments increased month-on-month, but due to the lackluster demand for Android phones, the revenue of related EEPROM and voice coil motor driver chip products was also affected. Notably, the company's 2Q24 NorFlash shipments (>0.113 billion units) increased by more than 100% month-on-month, and has achieved large-scale supply to fields such as e-cigarettes, TWS Bluetooth headsets, AMOLED mobile phone screens, and PLC components. The company's products remained stable in terms of cost and sales price, with a gross profit margin of 54.77% in 2Q24, which was basically flat from month to month (1Q24:

54.62%), the R&D expenditure rate fell back to 16.14%, and the return to mother/deducted non-net interest rate increased to 34.35%/29.43%, respectively. In terms of inventory, as of the end of the second quarter, the company's inventory was 0.22 billion yuan, which remained stable compared to the end of the previous quarter (0.219 billion yuan), and the number of inventory turnover days (172 days) fell back to the level of the end of '22.

2024 outlook: SPD sales are expected to maintain a high year-on-year increase. NOR or casting new growth curve, we see that the company's new products are gaining strength one after another, and the subsequent growth path is clear. Specifically: 1) We expect DDR5 penetration to increase in the second half of the year combined with a recovery in general-purpose server demand. We expect 3Q24's SPD shipments to maintain steady month-on-month growth; 2) Currently, the company's NOR Flash sales are mainly concentrated in the high-capacity small-capacity market. We expect to further improve the product layout in the second half of the year, which is expected to be achieved with the advantages of the NORD process The rapid increase in share has led to a new growth curve for foundry companies; 3) Vehicle EEPROM continues to expand to global customers; 4) Some models of OIS voice coil motor driver chips have been tested and verified by smartphone manufacturers, and are expected to be launched one after another this year.

Investment advice: Target price is 75.9 yuan, maintaining the “buy” rating. We believe that the company's short-term focus is still mainly on the increase in DDR5 penetration rate driving SPD sales. In the long run, NOR Flash may become a new growth engine, but currently profitability needs to be improved. The company's net profit for 24/25/26 is expected to be 0.365/0.529/0.729 billion yuan, respectively, with 33 x 24PE (comparable to the company Wind's consistent expectation of 38 x 24PE), with a target price of 75.9 yuan, maintaining a “buy” rating.

Risk warning: DDR5 penetration falls short of expectations, market competition intensifies, and new product promotion falls short of expectations.