Incident: The company released its 2024 semi-annual report. In 2024, H1 achieved revenue of 1.459 billion yuan, a year-on-year increase of 8.69%; realized net profit due to mother -0.067 billion yuan, a year-on-year decrease of 138.50%; and realized deduction of non-net profit of -0.042 billion yuan, a year-on-year decrease of 183.14%. In 2024, Q2 achieved revenue of 0.78 billion yuan, up 9.83% year on year; realized net profit of 0.004 billion yuan, down 102.66% year on year, up 94.13% month on month; realized deducted non-net profit of 0.008 billion yuan, down 70.72% year on year and 115.74% month on month.

The semiconductor industry picked up, revenue grew, and profitability improved markedly in 24Q2: In the first half of 2024, thanks to the recovery in the semiconductor industry and the company's strengthened market expansion and product structure adjustments, product sales achieved a significant year-on-year increase. However, as production expansion projects were converted one after another in 2023, fixed costs such as 24H1 depreciation costs increased a lot year-on-year, and in order to expand market share, the unit sales price of silicon wafer products and power chip products declined; at the same time, the decline in stock prices of listed companies held by the company caused fair value changes and losses. As a result, H1's revenue increased year over year in '24, and net profit declined significantly year over year. In '24, H1's gross margin was 12.38%, -14.89pcts year on year; net margin was -8.19%, -18.77pcts year on year. The company's gross margin in Q2 in '24 was 14.55%, -10.58pcts, +4.67pcts month-on-month; net margin was -3.30%, -20.72pcts, and +10.49pcts month-on-month. In terms of expenses, H1's sales, management, R&D, and financial expenses in '24 were 0.59%/3.99%/9.02%/7.16%, respectively, -0.12/+0.01/-0.78/+0.26pcts.

The three major businesses are progressing steadily, and RF chips contribute to profit growth: In the first half of 2024, demand in the semiconductor silicon wafer segment rebounded, and capacity utilization increased significantly. By business: 1) 24H1's semiconductor silicon wafer business revenue was 1.022 billion yuan, up 12.96% year on year; 24Q2 semiconductor silicon wafer revenue was 0.562 billion yuan, up 16.86% month-on-month. 2) 24H1's semiconductor power device business revenue was 0.448 billion yuan, down 16.62% year on year; 24Q2 semiconductor power device business revenue was 0.236 billion yuan, up 11.28% month on month. 3) 24H1's compound semiconductor RF chip revenue was 0.128 billion yuan, up 233.89% year on year. In terms of shipment, as of the first half of 2024, the company's production capacity for 6-inch and 8-inch epitaxial wafers was fully loaded, and delivery delays occurred; shipments of 12-inch silicon wafers climbed rapidly, and shipments repeatedly reached new highs; the company prioritized expanding the sales scale and proportion of groove products around the two major product categories, to steadily increase the production and sales share of FRD products; the RF chip verification process has basically covered mainstream domestic mobile phone chip design customers. Low-orbit satellite customers have passed verification and begun mass shipments. The company's compound semiconductor RF chip business has seen significant growth in terms of total number of customers, number of orders, capacity utilization, shipment volume, sales, etc., and gross margin changed from negative to positive.

The increase in production capacity has increased, and the scale effect has helped increase market share: According to the company's 2023 annual report, the company is actively promoting the construction of additional production capacity at various production bases: the Quzhou base's annual 6 million sheet 6-8 inch silicon polishing sheet project is expected to complete the migration of 8-inch 0.25 million wafers per month in September 2024; the Quzhou base's 12-inch silicon epitaxial wafer project with an annual output of 1.8 million wafers is under construction. The 12-inch silicon polishing sheet expansion project at the Jiaxing base is expected to reach a production capacity of 0.15 million wafers per month by the end of 2024. The Haining base completed the civil engineering project for a 6-inch microwave RF chip and device production line with an annual output of 0.36 million chips, and has begun bidding for major equipment, special gas engineering packages, chemical engineering packages, etc. It is expected to build a production capacity of 0.06 million pieces/year and put into commercial operation in the fourth quarter of 2024. As demand in the semiconductor market increases, the company is expected to benefit from the scale effect of its own industry and further increase its share in the semiconductor market.

Maintaining a “buy” rating: The company's three business segments have a wide range of product applications, including 5G communications, smartphones, computers, automotive industry, photovoltaic industry, consumer electronics, low-Earth satellites, smart grids, medical electronics, artificial intelligence, and the Internet of Things. As demand in the semiconductor market continues to recover and the company's new production capacity projects continue to advance, the company's market share is expected to increase further and profitability is expected to continue to improve. Considering that the company's performance in the first half of 2024 fell short of expectations and that additional production capacity has yet to be expanded, we lowered the company's profit forecast for 2024-2025. The company's net profit for 2024-2026 is estimated to be 0.197 billion yuan, 0.383 billion yuan, and 0.621 billion yuan respectively, EPS 0.29 yuan, 0.57 yuan, 0.92 yuan, and PE is 66X, 34X, and 21X respectively.

Risk warning: Market demand falls short of expectations, capacity construction falls short of expectations, risk of product price fluctuations, risk of market competition.