Event: The company released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 11.08 billion yuan, a year-on-year increase of 11.83%, and achieved net profit to mother of 0.323 billion yuan, an increase of 271.91% over the previous year.

Comment:

Benefiting from the recovery in downstream demand, the company's Q2 performance achieved rapid year-on-year and month-on-month growth. According to the company's semi-annual report, the company achieved revenue of 11.08 billion yuan in the first half of 2024, up 11.83% year on year, and achieved net profit of 0.323 billion yuan, up 271.91% year on year, corresponding 24Q2 revenue of 5.798 billion yuan, up 10.10% year on year and 9.77% month on month. Net profit corresponding to 24Q2 was 0.224 billion yuan, up 216.61% year on year and 127.60% month on month. In terms of profitability, the company's gross sales margin for the first half of 2024 was 14.16%, up 3.74 percentage points from the same period last year, and the net sales margin for the first half of 2024 was 3.30%, up 5.36 percentage points from the same period last year. On a quarterly basis, the company's 24Q2 gross sales margin was 16.00%, +4.73 pct year on year, +3.86 pct month on month, and the company's 24Q2 net sales margin was 4.31%, +8.39pct year on year. Since entering 2024, the global semiconductor market has returned to a growth trajectory in 2024 as consumer demand stabilizes, the memory market is picking up, and driven by hot application fields such as artificial intelligence and high-performance computing. According to WSTS statistics, global semiconductor sales in the first half of 2024 were 290.8 billion US dollars, up 18.1% year on year. Among them, China's semiconductor sales were 87.23 billion US dollars, up 25.28% year on year, faster than the global average. Driven by factors such as high-performance computing, AI phones, and AI PCs, the company achieved rapid year-on-year and month-on-month growth in 24Q2 business performance, and improved profitability.

The advanced packaging layout has achieved remarkable results, benefiting from the rapid development of artificial intelligence. In the first half of 2024, the global AI chip market grew rapidly. According to Gartner's forecast, the global AI chip market will increase 33% to 71.3 billion US dollars in 2024, and is expected to grow further 29% to reach 92 billion US dollars in 2025; the server AI chip market will reach 21 billion US dollars by 2024, and is expected to reach 33 billion US dollars by 2028, and the CAGR is 12%. The company is deeply tied to AMD, and as AMD's largest sealed testing manufacturer, accounts for more than 80% of its total orders. In the first half of 2024, AMD's data center business grew beyond expectations, thanks to strong demand for Instinct GPUs and EPYC processors from cloud customers and enterprise customers. Among them, MI300 GPUs exceeded expectations by 1 billion US dollars in a single quarter. AMD's revenue for data center GPUs this year was 4.5 billion US dollars, compared to 4 billion US dollars previously. With the sharp rise in demand for AI chips, advanced packaging production capacity has become one of the bottlenecks in AI chip shipments. TSMC, Sun Moon Light, and Anjiao all indicate that advanced packaging production capacity is tight and demand for related orders is strong. In the advanced packaging market, the company continues to develop large-scale, high-computing power products in the server and client markets. Relying on years of cooperation and first-mover advantage with leading companies in the industry such as AMD, the company's high-performance packaging business maintained steady growth in the first half of the year based on the continuous growth in demand for high-end processors and AI chips. At the same time, as opportunities for innovation in the AI+ industry increase, the industrialization of artificial intelligence has entered a new stage. The company is actively expanding production at the Penang plant in line with the requirements of leading customers such as AMD during the period of opportunity for artificial intelligence development to meet customer needs in all aspects.

The leading position in the industry is remarkable, R&D strength remains leading, and multi-location layout and cross-border mergers and acquisitions bring scale advantages. According to ChipInsights (ChipInsights) data, in the 2023 global outsourcing packaging and testing market share ranking, Tongfu Microelectronics ranked fourth in the world and second in mainland China among OSAT manufacturers, with a global market share of about 7.90%, making it a prominent leader in the industry. In terms of R&D strength and technical reserves, the company's R&D expenses for the first half of 2024 were 0.672 billion yuan, an increase of 9.35% over the same period last year. The R&D expenses rate was 6.07%, which was basically the same as the previous year. As of June 30, 2024, the company has accumulated 1,589 domestic and foreign patent applications, of which invention patents account for about 70%. At the same time, the company has successively obtained technical licenses from Fujitsu, Casio, and AMD, enabling the company to quickly enter the field of high-end sealing and testing, laying a solid technical foundation for the company to further advance towards advanced sealing and testing. In terms of industrial layout, the company has successively built factories in Chongchuan, Nantong, Jiangsu, Sutong Science and Technology Industrial Park, Hefei, Anhui, Xiamen, Fujian, and the North High-tech Zone of Nantong City; through the acquisition of 85% shares in AMD Suzhou and AMD Penang, it has production bases in Suzhou, Jiangsu and Penang, Malaysia. In the first half of 2024, the company signed an “Equity Purchase Agreement” with relevant parties to acquire 26% of Jinglong Technology's shares with its own capital. Jinglong Technology has a good operating model and financial situation, and it has a differentiated competitive advantage in the field of high-end integrated circuit professional testing. After completing the acquisition, the company's return on investment is expected to increase and bring stable financial returns.

Investment advice: The company is one of the world's leading semiconductor packaging testing companies. Benefiting from the recovery in downstream demand and high-end packaging and testing demand driven by AI chips, the company's earnings per share are expected to be 0.60 yuan and 0.87 yuan respectively from 2024 to 2025, corresponding to PE of 32 times and 22 times, respectively, maintaining a “buy” rating.

Risk warning: the risk that downstream demand recovery will fall short of expectations, and the risk of increased price competition in the industry.