Key points of investment

Event Overview: Zhuo Shengwei released the 2024 semi-annual report. In 2024Q2, the company achieved operating income of 1.095 billion yuan (yoy +14.84%, qoq -7.95%), achieved net profit due to mother 0.157 billion yuan (yoy -37.39%, qoq -20.82%), and achieved net profit of 0.16 billion yuan (yoy -35.81%, qoq -17.97%), comprehensive gross profit margin of 41.40% (yoy-7.83pcts, qoq-1.38pcts). In the first half of 2024, the company achieved operating income of 2.285 billion yuan (yoy +37.20%), net profit due to mother of 0.354 billion yuan (yoy -3.32%), net profit deducted from mother 0.354 billion yuan (yoy -3.43%), and a comprehensive gross profit margin of 42.12% (yoy-6.94pct).

The share of RF modules has increased steadily, compounded by early depreciation of the Xinzhuo production line and competitive pressure in some market segments, putting pressure on gross margins in the short term. In the context of the Android market entering the platform period, although the company's gross margin for the second quarter remained within the company's target gross margin range, there was a year-on-month decline. On the one hand, the company's RF module revenue share continued to rise in recent years, accounting for 42.29% in the first half of 2024. The complexity of module products and high packaging costs led to the gross margin of discrete devices. The gross margin of the company's discrete devices in the first half of the year was 43.25%, and the gross margin for modules was 40.71%. In addition, the Xinzhuo project is still in the construction stage. The depreciation of the company's fixed assets was about 0.26 billion yuan in the first half of 2024, and the depreciation amount is expected to be about 0.52 billion yuan for the whole year, putting a lot of pressure on the company's profit side in the short term, but as the subsequent gradual increase in capacity utilization, the scale advantage is expected to become prominent, and gross margin will rise back to a higher level.

The Fab-Lite production model has been strengthened, and the production capacity of 6-inch and 12-inch production lines has gradually climbed. The proportion of self-produced filters used in products has reached a high level, and a resource platform moat has gradually been built. (1) The product categories of the company's 6-inch filter production line have achieved a comprehensive layout, with large-scale mass production capacity for discrete devices such as duplexer/quadrature devices and single-chip multi-band filters. At the same time, products such as DiFeM, L-DiFem, and GPS modules that integrate self-produced filters have been successfully introduced to many brand customers and continue to be released. In the first half of the year, the company's 6-inch filter wafer production line actually shipped more than 0.1 million pieces since mass production on a stable scale.

(2) In terms of 12-inch production lines, the company's 12-inch IPD platform has officially entered large-scale mass production, and the proportion of L-pamif, LFEM and other related module products using self-produced IPD filters has reached a high level. In addition, the company's first-generation process production line for 12-inch RF switches and low-noise amplifiers has been completed and entered mass production in the second quarter. Production capacity has continued to rise. Currently, self-produced RF switches have been mass-produced and shipped, covering many brand customers and the vast majority of ODM customers. At the same time, the company is building high-end advanced module technology capabilities to achieve better performance and area advantages through 3D stacked packaging. The product has already entered the verification stage.

The L-pamid module series has been verified by some brand customers to achieve nationwide production in the supply chain and create autonomous and controllable capabilities for high-end products. As the pearl product with the highest degree of integration and the most complex technical difficulty among RF front-end modules, the company's L-PAMID module integrates the 6-inch filter max-saw, which is self-produced in a 6-inch filter wafer production line, and the product process level is leading in the country.

At present, the module series has been verified by some brand customers. The company's R&D covers the full band, and the Phase 7 and Phase 8 series architecture solutions are also progressing simultaneously. It is expected that the market share will continue to increase in the future by relying on autonomous and controllable capabilities.

Investment advice: Profit forecasts maintain a “buy” rating. The company is the first RF front-end company in China to have an independent wafer production line and achieve nationwide production in the supply chain. In the future, as the scale effect of production lines becomes prominent, it is expected to achieve a pioneering breakthrough in cost reduction for mature products and domestic substitution of high-end products. We expect the company's 2024, 2025, and 2026 revenue to be 5.259, 6.254, and 7.333 billion yuan (the original forecast values for 2024, 2025, and 2026 were 5.348, 6.488, and 8.189 billion yuan, respectively), and the company's net profit to mother for 2024, 2025, and 2026 is 0.839, 1.083, and 1.455 billion yuan, respectively (the original forecast values for 2024, 2025, and 2026 are 1.177 and 1.321, respectively) , 1.595 billion yuan), and the current market value is 40, 31, and 23 times PE in 2024, 2025, and 2026.

Risk warning: 1) Product development and verification fall short of expectations; 2) Production capacity expansion falls short of expectations; 3) Market competition intensifies.