Matters:

On August 13, 2024, the company released its 2024 semi-annual report:

1) 2024H1: The company achieved operating income of 4.398 billion yuan, +48.09% year on year; gross profit margin of 24.43%, +6.21pct year on year; net profit attributed/deducted from mother 0.187/0.095 billion yuan, turning a year-on-year loss into a profit;

2) 2024Q2: The company achieved operating income of 2.17 billion yuan, YoY/M +15.43%/-2.60%; gross profit margin of 23.86%, YoY -0.27pct/-1.13pct; net profit to mother 0.108 billion yuan, -62.45%/+35.94% YoY; net profit of 0.037 billion yuan after deducting non-return mother of 0.037 billion yuan, -84.38%/-34.80% YoY.

Commentary:

2024H1 performance improved significantly year over year, and continued expansion of production helped long-term growth. The boom in the DDIC and CIS industries, combined with the release of new technology/new products, led to a significant increase in the company's performance and profitability. 2024H1 revenue increased 48.09% year-on-year to 4.398 billion yuan, and gross margin was +6.21pct to 24.43% year-on-year. 2024H1 DIC, CIS, PMIC, MCU, and Logic accounted for 68.53%, 16.04%, 8.99%, 2.44%, and 3.82% of the main business revenue, respectively. CIS has become the company's second-largest product spindle and is fully loaded with production capacity.

As of 2024H1, the company's foundry production capacity is 0.115 million wafers per month, and plans to expand production by 0.03-0.05 million wafers per month in 2024. The production expansion process nodes mainly cover 55nm and 40nm, and will use advanced CIS as the main production expansion direction.

As the company's new process and process platform continue to expand, future profitability is expected to continue to improve.

The industry cycle continues to pick up, and the company is expected to usher in an accelerated release of performance flexibility. The company's foundry is a typical asset-heavy industry. In the context of a downturn cycle, depreciation and labor costs will seriously erode the company's profitability. 2024H1 has benefited from a recovery in consumer electronics demand such as mobile phones and televisions. The DDIC and CIS industries continued to recover, inventory removal from other product platforms such as MCU and PMIC was gradually completed, and the company's production capacity utilization rate continued to increase, and it has been at full capacity since March. Looking forward to the future, the company's performance is expected to continue to grow as subsequent demand from the industry continues to pick up and add revenue from the company's newly built production capacity and put into operation.

The company continues to make breakthroughs in high-end manufacturing processes, and multiple processes+multiple platforms drive future performance growth. The company continues to strengthen its technical capabilities. 2024H1's 55nm single-chip, high-pixel back-illuminated image sensor (BSI) ushered in mass production; 40nm high-voltage OLED display driver chips achieved small-batch production, 28nm OLED display driver chip development is progressing steadily; and the development of a new generation of 110nm enhanced microcontroller platforms has been completed. Looking at the process node, the company's 55nm, 90nm, 110nm, and 150nm accounted for 8.99%, 45.46%, 29.40%, and 16.14% of the company's main business revenue in the first half of 2024, respectively. 55nm's share increased by 4.16 pcts over the same period last year. The company's multi-process+multi-platform layout is expected to drive future performance growth.

Investment advice: Industry demand continues to pick up, and the company's new process and new process platform expansion is expected to open up room for growth. Considering that the company is still in a high R&D investment stage, we adjusted the company's net profit forecast for 2024-2026 from 0.8/1.2/1.628 billion yuan to 0.582/0.912/1.437 billion yuan, and the corresponding EPS is 0.29/0.45/0.72 yuan. Considering that the profitability of foundry companies fluctuates greatly, we adopted the PB valuation method, referred to industry comparable company valuations, and gave the company 1.75 times PB in 2024, corresponding to a target price of 19.2 yuan, to maintain a “strong push” rating.

Risk warning: The recovery in the industry fell short of expectations; industry competition intensified; the company's process expansion fell short of expectations.