Incident: China Micro announced its 2024 Q3 quarterly report. Revenue for the first three quarters of 2024 was 5.507 billion yuan, up 36.27% year on year; net profit to mother was 0.913 billion yuan, down 21.28% year on year; net profit after deducting non-return to mother was 0.813 billion yuan, up 10.88% year on year.

The company's etching equipment has been widely recognized by customers, and revenue has contributed rapidly: the company's plasma etching equipment continues to be recognized by more customers at home and abroad, new shipments of high-end products with key etching processes in advanced logic and memory device manufacturing have increased significantly, and the mid-stage key etching process for advanced logic devices and ultra-high aspect ratio etching processes for advanced memory devices have achieved mass production. The revenue of etching equipment in the first three quarters of 2024 was 4.413 billion yuan, an increase of about 53.77% over the same period last year. It is the company's main product.

R&D expenses are abundant, and new products are progressing smoothly: in the first three quarters of 2024, the company spent 1.544 billion yuan on R&D, an increase of about 95.99% over the previous year, and the R&D rate reached 28.03%. Benefiting from abundant R&D expenses, the company's many new devices are progressing smoothly. In 2024, the company's new product, LPCVD equipment, was sold for the first time. The company's EPI equipment has successfully entered the client mass production verification stage, completed process verification for many advanced logic devices and MTM device customers, and the results have been highly recognized by customers.

Product shipments and contract liabilities are growing rapidly, which is expected to support future performance: in the first three quarters of 2024, the company produced 1,160 cavities of special equipment, up about 310% year on year, corresponding output value of about 9.419 billion yuan, up about 287% year on year, laying a good foundation for the company's subsequent shipments and revenue confirmation. The balance of goods issued at the end of September 2024 was about 3.507 billion yuan, up 2.64 billion yuan from the balance of 0.868 billion yuan at the beginning of the year; the contract debt balance at the end of September 2024 was about 2.988 billion yuan, an increase of about 2.216 billion yuan over the balance of 0.772 billion yuan at the beginning of the year.

Investment proposal: We expect the company to achieve operating income of 8.579/11.736/14.557 billion yuan and net profit to mother of 1.713/2.486/3.144 billion yuan in 2024-2026. The corresponding PE was 65.47/45.13/35.69 times, respectively, maintaining the “gain” rating.

Risk warning: Domestic fab equipment procurement is slowing down; new product development progress falls short of expectations; industry competition intensifies.