1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 33.589 billion yuan, a year-on-year increase of 15.01%; net profit to mother of 0.14 billion yuan, a year-on-year decrease of 88.84%; deducted non-net profit loss of 0.128 billion yuan (non-recurring profit and loss is mainly capital and financial management income and government subsidies). 1H24's performance fell short of our expectations, mainly due to pressure on gross margin. Corresponding to 2Q24 revenue of 17.342 billion yuan, up 17.35%/6.74% month-on-month; net profit loss to mother of 2.98 million yuan; loss of non-net profit of 41.81 million yuan.

Development trends

Semiconductors: Supply chain inventory removal profitability is under pressure, and R&D investment continues to be high for a long time. 1) Revenue side:

1H24 semiconductor business revenue was 7.04 billion yuan, down 7.9% year on year, mainly due to weak demand in the European and American markets. At the same time, the company accelerated the development of leading domestic new energy customers to achieve a steady increase in sales volume and bicycle value, partially offsetting the impact of the European and American markets; 2) Profit side: 1H24 semiconductor business net profit of 1.08 billion yuan, down 22.4% year on year, mainly due to supply chain inventory removal, a year-on-year decrease of 6.35ppt. On a quarterly basis, 2Q24 gross margin increased 7.68ppt to 38.7% month-on-month. We judge that the main reason was the increase in capacity utilization and the company's operational efficiency due to increased sales volume. In addition, the company continued to increase R&D investment. The 1H24 semiconductor business R&D investment was 0.874 billion yuan. The company announced that it had enriched the product portfolio of medium and low voltage MOS and protection devices, and accelerated the launch of three and a half generations of products such as SiC MOSFETs, and continued to expand analog product numbers; Anshi announced in June that it plans to invest 0.2 billion dollars to develop the next generation of wide bandgap semiconductor products (WBG) and establish production infrastructure at the Hamburg plant.

Product integration: Rising raw material prices are putting pressure on profitability, and specific customer business is improving. 1) Revenue side:

1H24 product integration business revenue was 26.12 billion yuan, up 26.68% year on year. We judge that it was mainly due to the recovery in consumer electronics demand and the company's active expansion of new projects for major overseas customers; 2) profit side: net profit loss of 0.5 billion yuan (including 0.11 billion yuan of convertible debt financial expenses), mainly due to rising raw material prices and an increase in the share of low-margin products, gross margin decreased 6.61 ppt to 2.49% year on year. On a quarterly basis, 2Q24 gross margin fell 0.97ppt to 2.03% month-on-month. In terms of cooperation with specific customers, the company announced that AIPC, which is produced in cooperation with specific customers, has achieved global sales in early 2024. Feedback on market demand is positive, 2Q24 has increased rapidly, and next-generation projects are being promoted in cooperation. Looking ahead to the second half of the year, we are optimistic that the company will continue to increase the share of notebooks for specific customers, while actively developing new businesses such as automotive, AIoT, and home appliances to achieve a better improvement in performance.

Profit forecasting and valuation

Taking into account weak demand for automobiles and rising raw material prices in the European and American markets, the 2024 net profit forecast was lowered by 15.7% to 1.264 billion yuan; optimistic about the increase in specific customer share and new business progress in 2025, keeping the profit forecast unchanged for 2025. The current stock price corresponds to 25.7 times/13.5 times P/E for 2024/2025. Maintaining an outperforming industry rating, the target price was lowered by 11.7% to 34.0 yuan, corresponding to 33.4 times/17.6 times P/E in 2024/2025, with 30.3% upside compared to the current stock price.

risks

Downstream demand falls short of expectations; major customer expansion falls short of expectations; risk of impairment of goodwill.