Key points of investment:

2024Q3 performance forecast: net profit attributable to mother was 0.68-0.73 billion yuan, up 48%-59% year on year; net profit without return to mother was 0.67-0.72 billion yuan, up 55%-66% year on year. The 2024 Q3 results are in line with expectations.

2024 Equity incentives are inclusive, and the weighted average ROE is assessed. There were 625 incentive recipients. The number of stock options was 29.998 million shares, and the exercise price of the stock options granted was 20.22 yuan/share. The performance assessment goals for the two assessment periods: the weighted average return on net assets for 2024 and 2025 is not less than 15%, and the weighted average return on net assets for 2026 is not less than 15%, and neither is lower than the 80th quartile of rival companies in the same industry for the same period. 2019-23 weighted average ROE 16-27%.

2024H1 communication board revenue increased by 75%, investing 0.51 billion to improve the HDI production line. AI applications accelerate the transformation of 400Gbps and higher speed data center switches and AI server products, spawning strong demand for large size, high level HDI, and high frequency high-speed PCBs. 2024H1, corporate communications market revenue of 3.828 billion yuan, yoy +75.49%; the share of AI servers and HPC related products increased to 31.48% from 21.13% in 2023.

The share of revenue from the emerging car board increased to 34%. Major car manufacturers are gradually developing into a centralized EEA, and the demand is gradually being upgraded from traditional automotive boards that are mainly within 6 layers to multi-layer, high-grade HDI, high-frequency, high-speed, etc.; the subsidiary Shengweize's PCBs using P2Pack technology can be used in hybrid and pure electric vehicle drive systems, etc., and the 2023Q4 is used in 48V light-hybrid systems to achieve mass production of P2Pack products. From May to December 2023, Shengweize's cumulative loss was 0.105 billion yuan, a year-on-year decrease of 16.17%. Shengweiche's business losses affected the 2023/2024H1 company's gross margin of -2.21pct/-0.8pct year-on-year. The share of emerging automotive panels such as millimeter-wave radar, HDI autonomous driving assistance, intelligent cockpit domain controllers, embedded ceramics, thick copper, and P2pack increased from 21.45% in 2022 to 25.96% in 2023, and 33.69% in 2024.

Orders are saturated, increasing production capacity of high-end PCBs and Thai factories: According to the company's announcement, in early 2024, the company decided to invest about 0.51 billion yuan to implement a high-density high-speed interconnected printed circuit board production line technical improvement project for computing power networks; in terms of automotive boards, the new production capacity of Huangshi Plant 2's automobile board dedicated line was fully released, and capital was increased to about 0.776 billion yuan in early 2023 to expand the production capacity of high-end automotive HDI; in 2023, the 57% shareholding ratio of Shengweiche Electronics increased to 80%. Established in the year, it is mainly engaged in embedded power chip packaging integration technology, and is expected to reach a design production capacity of 1.26 million square meters by 2025. In terms of overseas factories, according to the 2024 interim report, 2024H1 invested about 0.582 billion yuan in the Thai factory construction and company renovation and expansion project; about 0.296 billion yuan was transferred to fixed assets. The Thai production base is expected to test production in 2024 Q4.

The profit forecast was raised and the “gain” rating was maintained. Increase the gross profit margin for communication boards and industrial PCBs, raise the 2024-26 net profit forecast from 2.2/2.6/3 billion yuan to 2.5/2.9/3.2 billion yuan, 2025 PE 27X, and maintain the “gain” rating.

Risk warning: AI PCB demand falls short of expectations, production expansion falls short of expectations, and the growth rate of automobile orders falls short of expectations.