Net profit for 3Q24 is expected to be 0.9-1.1 billion yuan. Product and supply chain structure optimization drives gross margin recovery. Welle announced the three-quarter report forecast, corresponding to 3Q24 revenue of 6.65-6.9 billion yuan, with a year-on-year increase of 7-11%, and net profit to mother of 0.9-1.1 billion yuan, an increase of 318-411% year-on-year, after deducting net profit of 0.83-1.03 billion yuan. We believe that 1) in the first half of 2024, market demand continued to recover, downstream demand recovered, and the company continued to penetrate mobile phone CIS products and automobile CIS products, leading to an increase in operating income and gross margin; 2) the increase in the company's share of high-margin products and improvements in the supply chain structure led to a recovery in gross margin. We expect the company's 2024/25/26 net profit of 3.24/4.21/5.19 billion yuan (previous value: 3.002/3.498/4.159 billion yuan) to reflect the recovery in gross margin.

Considering that the company's layout is complete, the subsequent profit growth rate may gradually slow down, 46.43 times PE in 2024 (industry average is 61.26 times 2024), corresponding to a target price of 127 yuan, to be purchased.

3Q24 revenue hit the highest level in a single quarter, and profitability continued to improve. The company's 3Q24 revenue was 6.65-6.9 billion yuan, higher than the previous highest level in a single quarter (2Q24 achieved 6.45 billion yuan in revenue). We believe it is mainly due to 1) the continuous growth of the company's automotive CIS product revenue. We expect the 24-year revenue level to be 2.65 times that of 21, and 2) the company's high-end CIS product line represented by the OV50H begins to expand. The company deducted non-net interest rate of 12.3-15.2% in 3Q24 (12-13% in 2Q24), and profitability improved significantly. Mainly due to improvements in the company's product portfolio structure, the share of high-end, high-margin mobile CIS products and automotive CIS products increased in revenue.

24/25: New automotive products are gradually being shipped, and it is expected to be introduced to new mobile phone customers. After expanding production capacity, we expect automotive CIS to maintain 35% revenue growth in 2024, and PMIC/SerDes/SBC/CAN/Lin will also be implemented one after another to generate revenue in 24/25. We expect the company's mobile phone base CIS to continue to increase its Android brand coverage in the next two years, increasing part of mobile phone profits, and after the company expands production in the foundry, it is expected that CIS components such as OV50D/OV50M used in the company's other secondary cameras and periscope cameras will continue to grow in volume and increase revenue in 25 years. Furthermore, we also expect that in 25/26, with the launch of Meta's consumer AR products, the company, as the core supplier of camera CIS, may also benefit from the gradual introduction of new products.

Maintain the purchase rating and target price of $127

We expect the company's net profit to be 3.24/4.21/5.19 billion yuan in 2024/25/26 (previous value:

3.002/3.498/4.159 billion) to reflect gross margin restoration. Considering that the company's layout has been perfected, the subsequent profit growth rate may gradually slow down, 46.43 times PE in 2024 (industry average is 61.26 times 2024), corresponding to a target price of 127 yuan, to be purchased.

Risk warning: In the global semiconductor downturn cycle, demand for mobile phones, etc. falls short of expectations, and industry competition intensifies.