3Q24: Gross margin increased for the fourth consecutive quarter, with outstanding profit performance. The company achieved revenue of 2.374 billion yuan (yoy: +78.33%, qoq: +9.34%), net profit to mother of 0.672 billion yuan (yoy: +199.90%, qoq: +19.02%), net profit of 0.657 billion yuan (yoy: +205.85%, qoq: +20.33%), all above the median performance forecast. The company's performance in the third quarter was impressive, mainly due to a sharp increase in gross margin compared to the same period, and the 3Q24 comprehensive gross margin reached 69.13% (yoy: +12.9pct, qoq: +5.3pct). We expect the sales share of high-end server processor products to increase mainly due to changes in product structure, which also reflects the company's increased bargaining power.

The increase in gross margin drove the company's 3Q24 net profit margin to 28.32% (yoy: +11.48pct, qoq: +2.3pct). Considering that the gross margin was much better than expected, we raised the company's 24/25/26 net profit forecast to 2.108/3.248/4.277 billion yuan (original value: 1.748/2.588/3.13 billion yuan). Due to the company's scarcity in the A-share market, DCU products are expected to capture more market demand, give a certain valuation premium, and give 25x 25PS (comparable to the company's consistent median expectation of 19X), with a target price of 139.3 yuan.

3Q24 review: Demand for server CPUs was strong, and the company actively prepared to meet downstream demand. 3Q24's revenue increased 9.35% month-on-month, but due to stronger demand for high-end server CPUs and a significant increase in the company's ability to guarantee supply compared to the same period last year, the company's product structure in the third quarter changed significantly compared to the first half of the year and the same period last year, which positively impacted the quarterly gross margin. In terms of costs, the company continues to increase investment in technology research and development. 3Q24 R&D expenses are 0.683 billion yuan (yoy: +54.32%, qoq:

+22.61%), but benefiting from the scale effect, the R&D expenditure rate fell 4.47pct year over year to 28.76%.

By the end of the third quarter, the book value of the company's inventory reached 3.896 billion yuan, an increase of 1.441 billion yuan over the end of the previous quarter. The company actively prepared goods to meet the increase in downstream demand; prepaid accounts were 2.213 billion yuan, a decrease of 0.877 billion yuan from the end of the previous quarter.

4Q24 outlook: Prosperity remains at a high level, focusing on the development of new DCU products. According to IDC data, 1H24 benefited from the accelerated digital transformation needs of cloud service providers and Internet companies, and China's x86 server shipments increased 10.4% year on year; the intelligent computing market also showed strong performance. According to Celixin Communications data, 1H24's bid amount and number of projects increased by 91.6% and 32.8%, respectively. We believe that the company can continue to benefit from the above industry trends and domestic replacement processes. Among them: 1) Haiguang CPU supports x86 instruction sets, integrates comprehensive advantages in ecology, performance, and security, and continues to make breakthroughs in key technologies such as high-end processor design and verification, and its share is expected to increase steadily; 2) Haiguang DCU maintains a rapid iterative pace and has built a complete independent open software stack, fully compatible with the “CUDA” and “RoCm” ecosystems, adapts to various API interfaces and compilers, supports a wide range of function libraries, AI algorithms and frameworks, and is expected to become It is one of the main suppliers of domestic AI chips.

Risk warning: “Entity List” supply chain uncertainty, increased market competition, and R&D falling short of expectations.