Key points of investment

Event Overview: Hongwei Technology released its 2024 semi-annual report. In 2024Q2, it achieved revenue of 0.39 billion yuan (yoy -9.94%, qoq +58.34%), achieved net profit of 0.004 billion yuan (yoy -86.63%, qoq +346.49%), and achieved net profit of 0.002 billion yuan (yoy -93.55%, qoq +139.74%), comprehensive gross profit margin of 15.62% (yoy-7.06pct, qoq-) 0.26pct). The first half of 2024 achieved operating income of 0.637 billion yuan (yoy -16.72%), realized net profit of 0.003 billion yuan (yoy -95.98%), realized net profit without return to mother of -0.003 billion yuan (yoy -105.21%), and a comprehensive gross profit margin of 15.72% (yoy-5.56pct).

The quarterly marginal improvement trend was significant, and gross margin stabilized. Looking at the first half of the year, due to increased competition in some market segments and downstream demand not returning to previous highs, the company's overall performance showed a year-on-year decline, but the second quarter showed a clear marginal positive trend. Not only did revenue achieve a 58.94% month-on-month increase, but net profit to mother and net profit after deducting net profit from non-return to mother both turned loss into profit month-on-month. In terms of gross margin, the first quarter was affected by price competition pressure in the electric vehicle industry, and the gross margin was under pressure in the short term; gross margin in the second quarter showed a steady month-on-month trend. On the one hand, it stemmed from the company's active adoption of cost control strategies to reduce costs and increase efficiency in terms of personnel optimization, raw material cost control, etc., and on the other hand, downstream demand was gradually released in the second quarter. The company's order situation picked up markedly, and companies in some segments provided customized solutions to customers, which had a positive effect on maintaining gross margin.

The basic downstream industrial control market has remained stable, vehicle regulation products have clearly been released, the photovoltaic inflection point effect has reached, and the strength to support the company's medium- to long-term performance restoration is relatively steady. Looking at the company's downstream application areas, the company's three major businesses of industrial control, new energy vehicles, and wind and solar storage go hand in hand, and their revenue share is relatively average. (1) Industrial control is the company's basic market business, and its performance grew steadily in the second quarter. The company not only actively maintained existing customers, but also increased its efforts to develop new customers at home and abroad, such as inverters and UPS power supplies used in the high-performance computing industry. In the second half of the year, led by the general environment of national economic recovery, it is expected to take a steady and progressive pace. (2) The company achieved a sharp increase in NEV loading volume in the first half of the year, and there is little room for prices to continue to decline. It is expected to perform better in terms of market share throughout the year. Currently, the company has several vehicle specification projects that are being converted at an accelerated pace. The company's automotive-grade 280A-820A/750V encapsulation modules were mass-produced in the first half of the year. (3) The photovoltaic industry has now initially emerged from the inflection point of a sluggish market. The boom continues to improve, and downstream customers are putting an end to inventory, demand for goods is improving, and the pace of demand release in emerging foreign markets is relatively good. Overall, the company's order situation continued to improve month-on-month, and medium- to long-term growth was steady.

Core kinetic energy production capacity continues to climb, and traditional encapsulation and new plastic encapsulation go hand in hand. The main body of the company mainly uses traditional encapsulation technology. The holding subsidiary Core Kinetic Energy mainly uses advanced domestic plastic packaging technology. Its plastic packaging module project has a production capacity of only 7.2 million/year, mainly to broaden the company's product models and scope of application in electric vehicles and other fields. Currently, the first production line is running steadily, with a monthly production capacity of about 0.1 million blocks, and new production lines are already steadily climbing production. In the first half of the year, the company's automotive-grade 400-800A/750V double/single-sided heat dissipation molding modules were mass-produced, providing new impetus for the company's sales growth of NEV main drive inverter modules this year, laying a solid foundation for the subsequent expansion of plastic modules into new application fields.

Continued investment in R&D of silicon carbide chips and related module packaging. The company's first 1200V 40mohm SiC MOSFET chip has been successfully developed and has passed reliability verification; the automotive-regulated 1200V 13mohm SiC MOSFET chip is being actively developed; the self-developed SiC SBD chip has passed reliability verification and system-level verification by many end customers, and has passed corresponding reliability and board-level performance tests on key clients, and some products have been shipped in small batches. On the one hand, the company is increasing its product release efforts for silicon carbide mixing modules, and on the other hand, it is expected to maintain its leading position as the silicon carbide packaging market continues to expand.

Investment advice: Profit forecasts maintain an “gain” rating. As downstream demand picks up further, it is expected that future performance will improve steadily. We expect the company's revenue for 2024, 2025, and 2026 to be 1.746, 2.136, and 2.69 billion yuan (the original forecast values for 2024, 2025, and 2026 were 1.851, 2.352, and 3.026 billion yuan, respectively), and the company's net profit for 2024, 2025, and 2026 is 0.074, 0.146, and 0.235 billion yuan, respectively (the original forecast values for 2024, 2025, and 2026 are 0.115, 0.186, 0.235 billion yuan), and the current market value is 36, 18, and 11 times PE in 2024, 2025, and 2026.

Risk warning: 1) Downstream demand recovery falls short of expectations; 2) Market competition intensifies; 3) Product verification falls short of expectations.