Shenghong Technology released its 2024 three-quarter report: in the first three quarters of 2024, the company achieved revenue of 7.698 billion yuan, +34.02% year over year; realized net profit of 0.765 billion yuan, +30.54% year over year; realized net profit without deduction of 0.778 billion yuan, or +33.2% year over year. In the first three quarters of 2024, the company achieved gross profit margin of 21.55%, -0.49pcts year on year; achieved a net profit margin of 9.93%, or -0.27pcts year on year.

Quarterly revenue and profit continue to reach record highs! On a quarterly basis, the company achieved revenue of 2.842 billion yuan in 24Q3, +37.07% year-on-month, and achieved six consecutive quarters of month-on-month growth since 23Q1; achieved net profit to mother of 0.306 billion yuan, +26.70% year-on-year, and +22.52% month-on-month; achieved net profit of 0.316 billion yuan, +36.54% year-on-month, and +23.98% month-on-month. The 24Q3 company achieved a gross profit margin of 23.17%, -0.77pcts year-on-year, and +1.48pcts month-on-month. The 24Q3 company achieved a net profit margin of 10.75%, -0.88pcts year-on-year and +0.63pcts month-on-month.

On the cost side, the company's 24Q3 sales expenses and management expenses were relatively stable, at 0.049 billion yuan and 85 billion yuan respectively, and the month-on-month changes were +0.007 billion yuan and -0.16 billion yuan respectively; R&D expenses and financial expenses increased month-on-month, 0.132 billion yuan and 0.53 billion yuan respectively, and the month-on-month changes in Q2 were +0.025 billion yuan and +0.048 billion yuan, respectively, for a total of 0.073 billion yuan yuan. The change in R&D expenses throughout the year was mainly due to the company's continued increase in R&D investment. The change in annual financial expenses was mainly due to the fact that the company acquired in November 23 this year's consolidated statement and fluctuations in the US dollar exchange rate affected exchange gains and losses.

Performance review: The company's performance in the first three quarters of 24 showed a quarter-on-quarter growth trend. Among them, in Q3, against the backdrop of a phased decline in the industry's momentum to pull goods, the company's performance still achieved further significant month-on-month growth, showing full operational resilience. We expect batch shipments to begin with new server products for major customers starting in 24Q4. The company is expected to simultaneously welcome large-scale orders for new AI HDI products, driving performance into an accelerated growth range, and revenue and gross margin are expected to continue to increase significantly!

A comprehensive breakthrough in the field of AI, with sufficient momentum for long-term growth. Over the past 24 years, the company has made comprehensive breakthroughs in the AI field, and various AI server core parts have been verified by major customers and mass production has been achieved. At the same time, the company strengthened AI-related product layout and development, continued to expand its product line, and cooperated deeply with many of the world's top customers in the fields of switches, AI servers, and high-end communications. With the deepening of customer cooperation and the release of the company's overseas production capacity, the company's AI business is expected to expand in multiple dimensions, fully blossom, and have sufficient momentum for long-term growth.

Profit forecast and investment advice: Demand for high-speed high-density interconnection of AI chips has spawned high-end HDI industry trends, and Shenghong Technology's core benefits from the wave of AI HDI upgrades. We are optimistic that the new AI server products for major customers will bring significant performance flexibility to the company, and that the demonstration effect of major customers will also help the company achieve effective expansion for other leading customers in North America. The company has made remarkable progress in R&D, production capacity and client services, and is looking ahead to card slot layout overseas production capacity to promote rapid introduction of core products. The business layout will enter a harvest period one after another in the next few years. The company is expected to achieve net profit of 1.22/2.51/3.26 billion yuan in 24/25/26 respectively. Among them, considering the comprehensive deepening of cooperation with major customers in 25 years and the rapid release of production capacity at the company's Thai factory, we raised the net profit to the mother in 25 to 2.51 billion yuan. The corresponding PE valuation for 24/25/26 was 32.3/15.8/12.2x, respectively, maintaining the “Highly Recommended” rating.

Risk warning: Downstream demand falls short of expectations, industry competition intensifies, and R&D falls short of expectations.