3Q24 results fell short of our expectations

Riyadh announced 1-3Q24 results: operating income of 5.465 billion yuan, a year-on-year decrease of 9%, and net profit to mother of 0.181 billion yuan, a year-on-year decrease of 61%. Corresponding to the 3Q24 single quarter, Riyadh achieved revenue of 1.833 billion yuan, a year-on-year decrease of 9%, and net profit to mother of 0.053 billion yuan, a year-on-year decrease of 57%, lower than our expectations. We believe that 3Q24 Riyadh's business is under pressure, mainly due to: 1) weak demand in the global LED market and pressure on domestic and overseas operations, leading to a decline in revenue; 2) due to poor demand, supply-side price competition intensified, leading to a 3.29ppt year-on-year decline in the company's gross margin.

Development trends

Optimize business management and continue to increase overseas markets. As of 3Q24, global LED demand was weak. Competition in the Chinese domestic market was particularly intense, and Riyadh's domestic revenue share was relatively high, leading to year-on-year pressure on gross margin. Since 1H24, Riyadh has continued to promote organizational restructuring and personnel optimization, and reduced production costs through automated transformation. We are optimistic that the optimization of the company's operations and management will gradually show results in the future, driving up gross margin. Furthermore, according to the 2024 semi-annual report, Riyadh began implementing overseas team management reforms such as Pinda in 2Q24, and has now achieved certain results. Looking forward to the future, we believe that the overseas market is expected to become an important layout and development direction for Riyadh. Considering that Riad has now deployed overseas production capacity in countries such as Slovakia, we are optimistic about the company's competitive advantage in localized production and sales in overseas markets to help the company achieve steady growth.

MIP and COB R&D are progressing smoothly, and production capacity expansion is progressing steadily. As LED spacing shrinks and application scenarios continue to be enriched, we are optimistic that COB will become the mainstream packaging solution for LEDs in the future.

Riyadh has a leading layout in the MIP and COB fields. It has been deeply involved for many years to achieve batch shipments in the P1.2-1.5 field. According to the company's announcement, Riyadh plans to complete MIP's new production capacity expansion by the end of this year. Through automated upgrades and high-end products such as P1.0, we are optimistic that the company will optimize gross margin and promote improved profitability.

Profit forecasting and valuation

Considering weak downstream demand and fierce price competition, we lowered Riyadh 2024/25e EPS24/ 17% to 0.13/0.18 yuan, corresponding to 2024/25e41.4/29.2x P/E. Maintaining an outperforming industry rating, considering the weak demand for LEDs and the pressure on the company's performance, we maintained a target price of 5.50 yuan, corresponding to 2024/25e 43.4/30.6x P/E, with room for 5% increase compared to the current one.

risks

The recovery in downstream LED demand fell short of expectations; MIP and COB technology research and development fell short of expectations.