Event: The company released its 2024 semi-annual report. During the reporting period, the company achieved operating income of 26.269 billion yuan, a year-on-year increase of 23.2%; net profit attributable to shareholders of listed companies was 1.646 billion yuan, a year-on-year decrease of 45.1%.

Comment:

The recovery in the semiconductor industry chain led to a year-on-year increase in the company's revenue, and the increase in depreciation expenses affected the profit level during the reporting period. According to the company's semi-annual report, the company achieved revenue of 26.269 billion yuan in the first half of 2024, up 23.23% year on year, and realized net profit of 1.646 billion yuan, down 45.07% year on year. The corresponding 24Q2 revenue was 13.676 billion yuan, up 23.10% year on year and 8.59% month on month. Net profit corresponding to 24Q2 was 1.137 billion yuan, down 19.11% year on year and 123.46% month on month. In terms of profitability, the company's gross sales margin for the first half of 2024 was 13.91%, down 8.53 percentage points from the same period last year, and the net sales margin for the first half of 2024 was 6.25%, down 11.00 percentage points from the same period last year; on a quarterly basis, the company's 24Q2 gross sales margin was 13.65%, -8.49 pct year on year, -0.54 pct month on month, and the company's 24Q2 net sales margin was 8.71%, -7.83 pct year on year, +5.14 pct month on month. In the first half of 2024, the global semiconductor industry as a whole showed signs of recovery. The trend of industrial chain recovery was basically established. Wafer processing ushered in a certain rebound in demand for key industries at the front end of the industrial chain, driving the company's 24H1 revenue to achieve year-on-year growth, and 24Q2 revenue to achieve year-on-year and month-on-month growth. In terms of profitability, the company's 12-inch production capacity construction accelerated during the reporting period, and depreciation expenses increased year over year. Combined with the reduction in foundry prices during the reporting period, the company's profitability was under pressure.

Benefiting from increased demand for localization and increased share of high value-added products, the company's 24Q3 guidelines are optimistic.

According to the 24Q2 unaudited results announcement previously issued by the company's Hong Kong Stock Exchange, the company's revenue guidance for 24Q3 is 13% to 15% month-on-month, and gross margin is in the range of 18% to 20%, which is quite positive.

Entering 24Q3, due to geopolitical influence, demand for localization is increasing at an accelerated pace, and chip sleeve production capacity in major market areas is in short supply. The company's 12-inch production capacity is tight, and prices are improving. In terms of product structure, the company expanded production by 12 inches this year, and the added value is relatively high. The newly expanded production capacity has been fully utilized and brought in revenue to promote the optimization and adjustment of the product portfolio, so the company is optimistic about the 24Q3 outlook. The foundry industry is seasonal. The fourth quarter is usually a traditional single season. The company is cautiously optimistic about the 24Q4 outlook, and indicated that the industry is still uncertain.

Leading domestic foundry companies benefit from multiple drivers of downstream demand recovery, domestic substitution, and product structure optimization. The company is a leading domestic foundry enterprise, and the wafer foundry output value has ranked first in the country for many years. According to the Counterpoint Research report, the company's market share in both 24Q1 and 24Q2 was 6%, ranking in the top three in the world for two consecutive quarters, and has a certain voice in the industry.

Looking ahead to the second half of the year, the company is expected to benefit from the continued recovery of consumer electronics and smartphone platforms, the acceleration of localized demand due to geopolitical influence, and the increase in product added value brought about by the continuous expansion of 12-inch production capacity. Business performance is expected to gradually recover, and long-term development momentum is abundant.

Investment advice: The company's earnings per share from 2024 to 2025 are expected to be 0.59 yuan and 0.76 yuan, respectively, corresponding to PE of 82 times and 63 times, respectively. For the first time, coverage is given a “buy” rating.

Risk warning: Risk of downstream demand recovery falling short of expectations, risk of increased competition in the foundry industry.