Incident: The company released its 2024 mid-year report. In the first half of 2024, the company achieved operating income of 4.398 billion yuan, a year-on-year increase of 48.09%; realized net profit to mother of 0.187 billion yuan, which significantly reversed losses over the previous year; deducted non-net profit of 0.095 billion yuan, which significantly reversed losses over the previous year. In 2024, Q2 achieved operating income of 2.17 billion yuan, up 15.43% year on year, down 2.60%; net profit to mother was 0.108 billion yuan, down 62.45% year on year, up 35.93% month on month; after deducting non-net profit of 0.037 billion yuan, down 84.38 year on year, down 34.79% month on month.

H1's profitability has improved dramatically, and production capacity is expected to remain at full capacity in Q3: with the gradual recovery of industry prosperity, the company's capacity utilization rate will continue to increase, production capacity will continue to be at full load from March 2024, and overall sales achieved rapid growth in the first half of the year, which helped the company's revenue and product gross margin to rise steadily. The company's consolidated gross margin for the first half of 2024 was 24.43%, up 6.21pcts year on year; net margin was 4.43%, up 8.49pcts year on year. In terms of expenses, H1's sales, management, R&D, and financial expenses rates in 2024 were 0.60%/3.74%/13.97%/3.18%, respectively, with year-on-year changes of -0.24/-0.52/-2.95/+3.19pcts, respectively. Among them, the financial expense ratio and value both increased significantly year-on-year, and the main cause was a year-on-year decrease in interest income and exchange income. The company said that it is expected that Q3 production capacity will continue to be at full capacity. The company has raised OEM prices for some products according to market conditions, and will continue to adjust OEM prices accordingly in the future based on market conditions and capacity utilization.

Benefiting from the recovery of the smartphone and semiconductor industry, the middle and high-end CIS production lines are fully operational: Canalys data shows that in Q2 2024, global smartphone market shipments reached 0.289 billion units, up 12% year on year. Meanwhile, according to IDC forecast data, benefiting from the gradual recovery in smartphone demand and strong demand for artificial intelligence chips, the semiconductor market is expected to resume its growth trend in 2024, with an estimated annual growth rate of over 20%.

Benefiting from the recovery in the smartphone and semiconductor industry, the company's middle- and high-end CIS downstream demand is strong, and the CIS business has achieved rapid development. In 2024, DDIC, CIS, PMIC, MCU, and Logic accounted for 68.53%, 16.04%, 8.99%, 2.44%, and 3.82% of the main business revenue, respectively. Among them, CIS accounted for a significant increase in the proportion of main business revenue, becoming the company's second-largest product spindle, and CIS production capacity is at full load.

The 40nm high-voltage OLED platform is produced in small batches, and the silicon-based OLED layout is expected to open up long-term space: the company always attaches great importance to product research and development, continues to increase investment in R&D, focus on core technology, keep up with trends in traditional fields and emerging markets, plan and develop richer process platforms, and continue to promote the development of advanced nodes in mature processes. At present, the company's 40nm high-voltage OLED chip process platform has achieved small-batch production, and the development of the 28nm chip process platform is progressing steadily. At the same time, the company's annual report shows that according to the forecast of the Chinese Academy of Information and Communications Technology, the average annual growth rate of the global AR/VR industry in 2020-2024 is about 54%, and the global AR/VR market is expected to reach 480 billion yuan in 2024. Currently, AR/VR micro display technology mainly uses two micro display solutions: LCoS (liquid crystal on silicon) and OleDOS (organic light emission on silicon). Mini/Micro LED inherits the advantages of OLED, and has better performance in terms of miniaturization, low power consumption, high color saturation, and response speed. At the same time, it has a longer service life than OLED, which can basically meet all the technical requirements of AR/VR for micro displays, so Mini/Micro LED is expected to become the next generation of mainstream display technology. In the field of AR/VR micro displays, the company is developing silicon-based OLED-related technology, and has developed in-depth cooperation with leading domestic panel companies to accelerate application implementation. In the future, as the AR/VR market continues to expand and the company makes breakthroughs in silicon-based OLED technology research and development, the company is expected to further open up room for performance growth.

Upgraded to “buy” rating: The company is mainly engaged in the 12-inch wafer foundry business and provides 150nm to 90nm foundry services. The main products it manufactures are panel display driver chips, which are the leading pure wafer foundry companies in the industry. Since 2023, the company's R&D projects have progressed smoothly, and 55nm TDDI products have been mass-produced on a large scale. The 40nm high-voltage OLED platform was mass-produced in small batches in Q2 in '24; 110nm DDIC has completed AEC-Q100 vehicle grade certification and passed the reliability test of the customer's 12.8-inch display assembly for automobiles. Along with the recovery in consumer electronics demand, the DDIC and CIS industry continues to rise, and the company's production capacity remains at full capacity, driving the company's gross margin to gradually recover. At the same time, as the company continues to make breakthroughs in the development of advanced processes and new technology process platforms, and the steady progress of advanced CIS production capacity expansion projects, the company is expected to further open up incremental markets such as new displays and automotive electronics, so it was raised to a “buy” rating. However, considering that the company's R&D investment remains at a high level, putting some pressure on the profit side, the profit forecast for 2024 and 2025 was lowered. The company's net profit for 2024-2026 is estimated to be 0.667 billion yuan, 1.031 billion yuan, and 1.476 billion yuan respectively, EPS 0.33 yuan, 0.51 yuan, 0.74 yuan, and PE is 45X, 29X, and 20X respectively.

Risk warning: Risk of demand recovery falling short of expectations; risk of high customer concentration; risk of exchange rate fluctuations; increased risk of industry competition.