3Q24 achieved revenue of 0.942 billion yuan (yoy: +44.01%, qoq: +7.23%), net profit of 0.141 billion yuan (yoy: +106.45%, qoq: +17.85%), net profit of 0.124 billion yuan after deducting non-return to mother (yoy: +165.86%, qoq: +20.19%). Revenue in a single quarter reached a record high, mainly due to:

1) Demand in the downstream smart wearable and smart home market continues to grow; 2) Achieving comprehensive coverage of smartwatches, sports watches and bracelets, and the market share is rapidly increasing; 3) The next-generation flagship chip BES2800 is further expanded. The 3Q24 company's gross margin improved month-on-month. The increase in profit significantly exceeded the increase in revenue due to the scale effect, and the net profit margin to mother increased to 15.02% (yoy: +4.54pct, qoq: +1.35pct).

We are optimistic that the subsequent expansion of the company's wearable category and the iterative product upgrade of two-wheel drive will fully benefit from the AI dividend on the end side. The performance will continue to grow rapidly and maintain the rating of increasing holdings.

3Q24 review: Gross margin improved quarterly, and profit was released due to scale effects. According to the company's announcement, customer products such as OnePlus Watch 2 (BES2700BP), Samsung Galaxy Bud3 Pro (BES2800), and ONN portable wireless speaker (BES2600WM) have been released one after another since 3Q24, driving the company's chip sales to continue to grow, and the average chip price has also increased. From a gross margin perspective, benefiting from changes in the company's product structure and the decline in upstream costs, 3Q gross margin increased 1.30pct month-on-month to 34.69%. We expect the above two factors to further increase 4Q gross margin quarter by quarter. In addition, the company's control effect in terms of expenses was evident. Three fees (operation+management+R&D) decreased by 2.39 pct to 19.74% month-on-month, of which R&D expenses were 0.152 billion yuan (qoq: -2.93%). The increase in financial expenses was mainly due to large fluctuations in the 3Q exchange rate, which caused an exchange loss of 15.33 million yuan, which led to a 106%/18% year-on-month increase in profit from the same period last month. In terms of inventory, as of the end of 3Q24, the company's inventory was 0.672 billion yuan, a decrease of 0.011 billion yuan from the end of the previous quarter, and the inventory turnover period was 110 days.

4Q24 outlook: A variety of BES2800 terminal projects are expected to be released. End-side AI opens up room for growth considering seasonal factors in consumer electronics. We expect 4Q24 revenue to decline slightly or month-on-month, but the company's current project reserves are abundant, and customer product releases one after another will smooth out some of the off-season effects. Specifically: 1) The basic headphone business will continue to grow steadily. According to IDC data, global TWS headphone sales will achieve a 14.2% year-on-year increase in 2024. The company is deeply tied to downstream brand customers and penetrates the middle and lower end markets through price declines; 2) Starting at the end of the year, more BES2800 chips will be installed in headsets, smartwatches, smart glasses, etc., which will help the company increase ASP average. Furthermore, the company has always maintained leadership in connectivity technology (Wi-Fi, Bluetooth, Starlight, etc.), audio and display technology, and health monitoring technology, and will be able to better capture the new demands brought about by AI.

Investment advice: Target price of 290 yuan, maintaining the “gain” rating

We believe that the company's years of refining technology for low-power products will help the company seize more opportunities under the wave of end-side AI, and we can expect to see more new products launched in the future. Maintain the company's net profit forecast of 0.394/0.6/0.795 billion yuan for 24/25/26, and consider that BES2800 will expand on a large scale, giving 58x 25PE (comparable to the company's consistent expectation of 56x), a target price of 290 yuan, and a “gain” rating.

Risk warning: Downstream demand weakens or sales fall short of expectations, and market competition intensifies.