Incident: Hengxuan Technology released its 2024 mid-year report. 2024H1 achieved revenue of 1.531 billion yuan, a year-on-year increase of 68.26%; realized net profit to mother of 0.148 billion yuan, an increase of 199.76% year-on-year; and realized deduction of 0.112 billion yuan in non-net profit, an increase of 1872.87% year-on-year. Among them, Q2 achieved revenue of 0.878 billion yuan, up 66.80% year on year and 34.45% month on month; realized net profit of 0.12 billion yuan, up 140.00% year on year, up 334.87% month on month; realized deducted non-net profit of 0.103 billion yuan, up 237.50% year on year, up 1028.76% month on month.

Downstream demand continues to grow, driving the company's performance to achieve high growth. In the first half of 2024, the company's downstream smart wearable and smart home market demand continued to grow: 1. The market share of the company's smartwatch/bracelet chips increased rapidly. With the rapid iteration of the company's wearable chips, the company's competitiveness in the smartwatch/bracelet field was further enhanced. On the basis of the flagship chip BES2700BP, the company has successively launched new products such as BES2700IBP and BES2700iMP, which have achieved full coverage of smartwatches, sports watches and bracelets. Shipments have grown rapidly, and market share has increased. In the first half of 2024, the company's smartwatch/bracelet chips accounted for about 28% of revenue, a significant increase over last year, driving the company's rapid revenue growth; 2. The BES2800 next-generation wearable chip was mass-produced and launched, and the company's next-generation smart wearable chip BES2800 achieved mass production and shipment. The chip uses advanced 6nmFinFET technology and integrates multi-core CPU/GPU, NPU, high-capacity storage, low-power Wi-Fi and dual-mode Bluetooth in a single chip, which can provide powerful computing power and a high-quality seamless connection experience for wearable devices. The chip has now been introduced in several customers' headsets, smartwatches, smart glasses and other projects, and is expected to gradually start increasing in the second half of the year.

Operational capacity continues to improve, and investment in R&D of high-level technologies continues to increase. With 2024H1, the company's total sales expenses, management expenses, and R&D expenses totaled 0.395 billion yuan, accounting for 25.81% of revenue, down 7.36 pcts from the same period last year. At the same time, since a continued high level of R&D investment is the key for the company to maintain its core competitiveness, during the reporting period, the company's R&D expenses were 0.322 billion yuan, an increase of 36.76% over the same period last year. At the end of the year, the total number of R&D personnel was 571, accounting for 85.74% of R&D personnel.

Investment advice

We expect the company to achieve revenue of 3.156, 4.136, and 5.312 billion yuan in 2024-26, and achieve net profit of 0.355, 0.541, and 0.777 billion yuan, corresponding to PE 90.51, 59.52, and 41.43x, for the first time covered and given a “buy” rating.

Risk warning: risk of downstream demand falling short of expectations; risk of fluctuations in industry sentiment; risk of new product introduction falling short of expectations