Revenue and gross profit exceeded expectations, and cash reserves were sufficient: the company achieved revenue of 88.89 billion yuan in Q2 of 2024, up 32.0% year on year, exceeding market expectations of 86.75 billion yuan; overall gross margin was 20.7%, down 0.3 percentage points year on year, exceeding market expectations by 19.6%. The overall operating expense ratio was 14.2%, down 1.0 percentage point year on year; net profit was 5.07 billion yuan, up 38.3% year on year; adjusted net profit was 6.18 billion yuan, up 20.1% year on year; cash reserves were 141 billion yuan, up 24.5% year on year; as of July 19, 2024, 0.248 billion shares had been repurchased, with a repurchase amount of HK$3.68 billion.

Mobile phone shipments and market share are rising steadily: mobile phone x AIoT revenue was 82.52 billion yuan, up 22.5% year on year, gross profit margin was 21.1%, up 0.1 percentage point year on year. By sector, mobile phone revenue was 46.52 billion yuan, up 27.1% year on year, mainly because mobile phone shipments increased 28.1% year over year to 42.2 million units, injecting new impetus into shipment growth; gross margin was 12.1%, down 1.2 percentage points year on year, mainly due to mobile phone ASP falling 0.8% year on year to 1103.5 yuan and increasing sales volume in some emerging markets with low ASP. We expect that the smooth advancement of domestic high-end technology will offset the negative impact of the expansion of some emerging markets with low ASP, while continuing to pay attention to the impact of raw material costs on mobile phone gross profit.

IoT and Internet business revenue reached a record high: the IoT business reached a record high, revenue increased 20.3% year over year to 26.76 billion yuan, gross margin was 19.7%, up 2.1 percentage points year on year, mainly benefiting from the excellent performance of the smart appliances, tablets, and wearables business and self-developed production strategies. Internet service revenue increased 11.0% year over year to 8.27 billion yuan, a record high. Among them, advertising revenue was 6 billion yuan, up 16.9% year on year; gross margin was 78.3%, up 4.2 percentage points year on year. The number of global monthly active users reached 0.676 billion, an increase of 11.5% over the previous year, and the monetization of overseas Internet services accelerated. This share of revenue continued to rise, reaching 2.7 billion yuan in revenue, an increase of 32.9% over the previous year.

Vehicle deliveries continue to rise, and gross profit exceeds market expectations: automobile and other innovative businesses have revenue of 6.37 billion yuan, of which automobile sales revenue is 6.24 billion yuan, ASP (excluding VAT) was 0.229 million yuan, and 27,307 vehicles were delivered in Q2. The current monthly delivery volume has remained above 0.01 million units. With the full expansion of the double shift system, delivery volume will continue to rise. We expect the company to reach the original delivery target of 0.1 million units in November. The gross margin was 15.4%, far exceeding market expectations. This is mainly due to better bargaining power in the supply chain, sales exceeding expectations under the explosive model, and reuse of the accumulated power of consumer electronics. We expect the gross margin of automobiles to continue to increase as the scale continues to expand and the free benefits of car configurations are reduced.

Target price of HK$22.58, maintaining a buy rating: We forecast the company's revenue for 2024-2026 to be $339.09/396.7/431.79 billion, and net profit of $17.03/21.6/27.11 billion, respectively. According to the valuation situation of similar companies, we have given the company a target price of HK$22.58 for the next 12 months, which is equivalent to 15 xPE for the traditional core business in 2025 and 2xPS for the automobile business. The target price corresponds to the 2025 target price corresponding to 25x/20xPE in 2025/2026, respectively. There is room for 18.47% increase compared to the current price, so the purchase rating is maintained.