Incident: The company released its 2024 semi-annual report. 24Q2 achieved revenue of 2.171 billion yuan, a year-on-year increase of 49.67%, and net profit to mother of 0.565 billion yuan, an increase of 28.95% year-on-year. After deducting non-net profit of 0.546 billion yuan, a year-on-year increase of 27.37%.

Revenue and profit are all at the median forecast level, and overall in line with market expectations. 1) We predict that demand for the 7000 series (high-end server chips) will increase, and Xinchuang procurement such as energy, finance, and telecommunications will continue in the second quarter; 2) the 3000 series (workstation chips) may increase shipments in Q2 and gradually complete inventory sales; 3) After 2Q24, enterprises in key industries such as China Mobile, China Telecom, Agricultural Bank, CCB, and Industrial Bank will speed up Xinchuang bidding and release demand for Xinchuang.

Inventory is growing rapidly, and stocking shows confidence in downstream demand. The 24Q2 company's net operating cash outflow was 45.43 million yuan, with a net inflow of 0.76 billion yuan during the same period in 23Q2. The predicted cash outflow was mainly due to the company's increased preparation of raw materials, while the company's inventory reached 2.455 billion at the end of the second quarter, a further increase compared to 1.7 billion at the end of the first quarter; the predicted reason was that demand grew faster, the preparation cycle was earlier and the preparation volume increased; the balance sheet showed that the company had strong confidence in future operations.

Accounts payable and contract liabilities have all expanded, and demand has been verified simultaneously. Accounts payable at the end of the second quarter reached 0.83 billion, up 158% from the end of the previous year, mainly due to an increase in procurement and processing business volume. Contract liabilities increased from 2.85 million yuan to 15 million yuan at the end of the year, mainly due to an increase in contract advance payments received.

The gross margin increased significantly year-on-year, and the product pricing system is superior. 24Q2's comprehensive gross profit margin was 63.83%, +1.66pct year over year and +0.96pct month-on-month. The forecast is mainly due to tiered pricing strategies for products such as the CPU 7300 series.

R&D personnel are growing rapidly, next-generation DCU projects have been approved, and the R&D capitalization rate has declined significantly. The company invested a total of 1.37 billion yuan in R&D in the first half of the year, up 11.54% year on year; the number of R&D personnel reached 1,855 (1,382 in the same period in '23), of which 0.27 billion yuan was capitalized, and the capitalization rate was 19.4%. Compared with 23H1, the capitalization rate decreased significantly. Among the research projects, capitalization projects such as the next-generation Haiguang DCU have been approved and completed.

Shenzhen Computing DCU No. 2 began commercial use, No. 3 was successfully developed, and demand for AIGC was strong. Haiguang DCU is based on the GPGPU architecture and is compatible with a general “CUDA-like” environment. Haiguang DCU can fully support large-scale model training, achieve comprehensive application of large models represented by LLama, GPT, Bloom, ChatGLM, Wudao, Zidongtai Elementary School, etc., and is fully compatible with domestic large models, including Wenxin, to reach the leading level in China. Shenzhen Computing New was released on the 2nd. Is subsequent product development progressing smoothly? Maintain a “buy” rating. Maintaining the profit forecast, the company's revenue for 2024-2026 is 8.525, 11.123, 13.549 billion yuan, and 2024-2026 profit is 1.668, 2.312, and 2.797 billion yuan. Based on Haiguang's proven ability to iterate itself, the CPU/DCU performance is comparable to that of overseas giants, fully benefiting from domestic server replacement opportunities and maintaining the purchase rating.

Risk warning: Localized server industry may increase competition and supply chain risks due to increased international trade frictions.