Event: On October 15, the company released the results report for the third quarter of 2024. During the reporting period, the company achieved operating income of 6.127 billion yuan, an increase of 55.64% year on year; realized net profit of 1.526 billion yuan, an increase of 69.22% year on year; realized deducted non-net profit of 1.475 billion yuan, an increase of 76.87% year on year.

Profitability continued to increase, and gross margin in a single quarter in Q3 reached a record high: the company's performance in the first three quarters remained high. Looking at it: 1) Revenue: The company achieved operating income of 6.127 billion yuan in the first three quarters, up 55.64% year on year, higher than the median value of the previous three quarterly reports (the performance forecast range was 5.836-6.358 billion yuan, median value was 6.097 billion yuan). Looking at the single quarter, 24Q3 achieved revenue of 2.374 billion yuan, an increase of 78.33% year on year. 9.34% increase over the previous quarter; 2) Net profit to mother of 1.526 billion yuan in the first three quarters, up 69.22% year on year, higher than the median forecast of the previous three quarterly reports (performance forecast range was 14.08 to 1.586 billion yuan, median value was 1.497 billion yuan). Looking at a single quarter, 24Q3 achieved net profit of 0.672 billion yuan in a single quarter, up 19.02% year on month; 3) Gross profit margin: achieved gross profit margin in the first three quarters 65.63%, +5.01pct; 24Q3 single quarter gross profit margin 69.13%, YoY +12.91pct, +5.3pct month-on-month. We believe that the company's three-quarter report has maintained a good growth trend. Whether viewed in the third quarter as a whole or in a single quarter, the net profit growth rate exceeded the revenue growth rate, reflecting the continuous improvement of the company's profit quality; the company's gross margin continued to grow, and the 24Q3 gross margin fell to a record high, showing that the company's core products are highly competitive in the market, and the company has strong bargaining power.

Continuing to increase investment in technology research and development, inventory growth verifies a high level of prosperity. During the reporting period, the company's R&D expenses were 1.814 billion yuan, up 41.83% year on year, 24Q3 R&D expenses were 0.683 billion yuan, up 54.52% year on year and 22.62% month on month; the company's inventory book value in the first three quarters was 3.896 billion yuan, up 263% from the initial period (1.074 billion yuan), up 1.441 billion yuan from the previous quarter. We believe that the company continues to increase and continue to invest in R&D, but the share of R&D investment in revenue is gradually decreasing, indicating that the transformation effect of the company's R&D results is remarkable, and the company will continue to increase R&D investment in the future; the sharp increase in inventory indicates that the company is actively preparing stocks to meet downstream demand, the downstream has entered a boom cycle, and the high level of prosperity has been fully verified. High demand for domestic computing power is compounded by a marginal recovery in Xinchuang, opening up room for the company to grow. During the reporting period, the company's product performance continued to improve, and the high-end processor field has core advantages. Its products include Haiguang General Purpose Processor (CPU) and Haiguang Co-processor (DCU). The CPU series products are compatible with x86 instruction sets and mainstream international operating systems and application software. The software and hardware ecosystem are rich, excellent performance, safe and reliable, and have been widely used in important industries or fields such as telecommunications, finance, the Internet, education, and transportation. DCU series and series products are based on GPGPU architecture, are compatible with general “CUDA-like” environments, and can be widely used in application fields such as big data processing, artificial intelligence, and commercial computing. We believe that with the continuous iteration and upgrading of the big model, the advancement of China's integrated computing power network and the “East Digital Western Computing” project, and the hierarchical strengthening of credit and innovation policies, the company is expected to continue to benefit from industry trends and open up room for growth.

Investment advice: The company is a leading domestic high-end processor company. It is in a leading position in the country in the field of CPU and DCU chip technology. The localization penetration rate of “Xinchuang+ Computing Power” continues to increase, which is expected to open up room for growth. It is estimated that in 2024-2026, the company's net profit to mother will be 2.009/2.764/3.748 billion yuan, respectively, 59.08%/37%/34.04%. The corresponding PE is 85/62/46 times, respectively, maintaining the recommended rating.

Risk warning: Technology research and development progress falls short of expected risk; AI development falls short of expected risk; policy advancement falls short of expected risk; downstream enterprise demand falls short of expected risk; industry competition increases risk.