Incidents:

On October 25, Hitachi Precision released its 2024 three-quarter report: In the first three quarters of 2024, the company achieved operating income of 177.177 billion yuan, +13.67% year over year, net profit to mother of 9.075 billion yuan, +23.06% year over year, and realized net profit without deduction of 8.117 billion yuan, or +15.43% year over year. In Q3 2024, the company achieved operating income of 73.579 billion yuan, +27.07% YoY, realized net profit to mother of 3.679 billion yuan, +21.88% YoY, and realized net profit without deduction of 3.158 billion yuan, or +9.71% YoY.

On October 25, the company released its full-year performance forecast for 2024: net profit of 13.143-13.691 billion yuan in 2024, +20% to +25% year over year, median value of 13.417 billion yuan, +22.50% year over year, estimated net profit without return to mother is 11.486-12.713 billion yuan, +12.713 billion yuan year on year, +12.76% to +24.82% year on year, median value of 12.099 billion yuan, +18.79% year over year. In Q4 2024, net profit due to mother is expected to be 4.068-4.616 billion yuan, +13.69% to +28.99% year over year, median value of 4.342 billion yuan, +21.34% year over year. Net profit without return to mother is expected to be 3.368-4.596 billion yuan, +6.83% to +45.77% year over year, median value of 3.982 billion yuan, and +26.30% year over year.

Investment highlights:

The company continued to steadily advance the development of all major business segments, with steady operating performance in the first three quarters.

In the first three quarters of 2024, the company's various businesses progressed smoothly. Only the subsidiary Likai Precision had significant cost losses due to the impact of smart headset products from major customers. The growth rate of net profit not attributable to mother in the first three quarters of 2024 was slightly lower than the growth rate of net profit attributable to mother. Mainly, exchange rate evaluation gains and losses at the end of the month were included in the current profit and loss financial expense account, while profit from foreign exchange hedging operations was included in non-recurring profit and loss.

Q3 smart phone shipments to major customers increased year over year, and Apple Intelligence is about to launch. According to IDC, in Q3 2024, smart phone shipments to major customers were 0.056 billion units, +3.5% year over year, with a market share of 17.7%. Apple Intelligence will be launched soon. According to Apple's official website, Apple Intelligence will launch in October, expand to Australia, Canada, New Zealand, South Africa and the United Kingdom in December, and will support more languages such as Chinese, French, Japanese, and Spanish next year. The accelerated implementation of AI on the smartphone end side is expected to drive a wave of switching. The company cooperates closely with major customers, and is expected to significantly benefit the AI process on the end side.

Gross margin was under pressure due to epitaxial mergers and acquisitions, and net profit margins to mother performed steadily. In the first three quarters of 2024, the company's gross margin was 11.72%, -0.08pct year on year, and the net profit margin to mother was 5.12%, +0.39pct year on year. 2024Q3, the company's gross margin was 11.75%, -2.01pct year on year, and the net profit margin to mother was 5.00%, and -0.21pct year on year. The company's gross margin declined. We judge that operating costs have increased mainly due to extrinsic mergers and acquisitions.

The year-on-year increase in the management expense ratio is due to an increase in the cost of newly acquired subsidiaries, and the company is focusing on R&D investment.

In the first three quarters of 2024, the company's sales, management, and financial expense ratios were 0.43%, 2.43%, and 0.10%, respectively. The year-on-year increase was +0.04pct, +0.25pct, and -0.02pct, respectively. The large year-on-year increase in management expenses was mainly due to an increase in the company's expenses for newly acquired subsidiaries. In the first three quarters of 2024, the company's R&D expenses rate was 3.95%, +0.01pct compared to the previous year. The company focused on R&D investment and continued to improve the competitiveness of its products.

Profit forecast and investment rating: Considering the sales situation of smart headsets from major customers, the company's 2024-2026 revenue is estimated to be 266.877, 332.528, and 394.612 billion yuan respectively, net profit to mother is 13.415, 17.419, and 21.627 billion yuan respectively, EPS is 1.86, 2.41, and 2.99 yuan respectively, and corresponding PE is 23X/18X/15X respectively. Lixun Precision is a leading consumer electronics company with deep cooperation with major North American customers and is expected to continue We have received orders for new material numbers and system assembly services, while actively expanding the automotive and communications business and maintaining a “buy” rating.

Risk warning: Consumer electronics demand falls short of expectations, major customer business products fall short of expectations, geopolitical risks, new business expansion falls short of expectations, and industry competition intensifies.