Key points of investment:

Incident: Haiguang Information's 2024 three-quarter report shows that the main revenue for the first three quarters was 6.137 billion yuan, up 55.64% year on year; net profit to mother was 1.526 billion yuan, up 69.22% year on year; after deducting non-net profit of 1.475 billion yuan, up 76.87% year on year.

Revenue and profit were above forecast in line with market expectations. During the reporting period, the company focused on the general computing market, continued to increase investment in technology research and development, and maintained market leadership in product competitiveness. As market demand continues to increase, it has further driven the rapid growth of the company's operating income.

The profit growth rate was significantly higher than revenue, and gross margin increased significantly year-on-year. It is expected to be mainly due to the pricing advantage system brought about by the strong competitiveness of the product. The 24Q3 company's comprehensive gross profit margin was 69.1%, +12.9pct year on year, +5.3pct month on month, 65.6% for the first three quarters, and +5.0pct year on year. Previously, the market feared that the company's gross margin in the third quarter might be under pressure due to the influence of tiered pricing strategies, competition, etc., and that actual gross margin did not decline but increased. We think the main reason is that the company's CPU high-end processor products are highly competitive, and the original advantageous pricing system has been maintained.

The continued expansion of inventory shows confidence in stocking. At the end of the third quarter, the company's inventory reached 3.9 billion yuan, an increase of 1.44 billion yuan compared to the end of the second quarter; the forecast is due to faster demand growth, earlier preparation cycle and increased preparation volume. Prepaid accounts at the end of the third quarter were $2.213 billion, a decrease of $0.877 billion from the end of the previous quarter.

Investment in research and development remains high. The company spent 0.683 billion yuan on R&D in the third quarter (yoy: +54.32%, qoq: +22.61%).

The company's sales expense ratio for the first three quarters was 1.96%, up 0.31 percentage points year on year. The management expense ratio and R&D expense ratio were 1.66% and 29.56% respectively, down 0.90 and 2.88 percentage points year on year.

Commercial use of Shenzhen DCU 2 began, and R&D of DCU 3 went smoothly. We are closely monitoring the application progress of Shenzhen Computing 3 after 24Q4. Haiguang DCU is based on the GPGPU architecture and is compatible with a general “CUDA-like” environment. Haiguang DCU can fully support large-scale model training, achieve comprehensive application of large models represented by LLama, GPT, Bloom, ChatGLM, Wudao, Zidongtai Elementary School, etc., and is fully compatible with domestic large models, including Wenxin, to reach the leading level in China. Shenzhen Computing New was released on the 2nd, and subsequent product development is progressing smoothly.

Raise profit forecasts and maintain “buy” ratings. Maintaining the revenue forecast, the company's revenue for 2024-2026 is expected to be 8.525, 11.123, and 13.549 billion yuan. Considering the significant increase in the company's gross margin and the beginning of large-scale effects on R&D and other expenses, the 2024-2026 profit forecast was raised to 1.972, 2.524, and 3 billion yuan. The original forecast was 1.668, 2.312, and 2.797 billion yuan. Based on Haiguang's proven ability to iterate itself, the CPU/DCU performance is comparable to that of overseas giants, fully benefiting from domestic server replacement opportunities and maintaining the purchase rating.

Risk warning: Localized server industry may increase competition and supply chain risks due to increased international trade frictions.