Shennan Circuit released its 3Q24 results. Revenue went up 37.9% YoY/8.5% QoQ to RMB4.73bn, beating Bloomberg consensus by 19.7%. Net profit rose 15.3% YoY but declined 17.6% QoQ. GPM declined to 25.4% QoQ in 3Q24 from 27.1%/23.4% in 2Q24/3Q23. Mgmt. attributed this to 1) higher sales contribution from lower margin PCBA business (GPM at c.15%), 2) Guangzhou factory ramp-up suppressed substrate margin, and 3) high copper price (avg. copper price in 3Q24 was ~US$9.9k/t), and increased auto sales weighed on PCB's profitability. NPM declined 3.3ppts sequentially to 10.6%. Maintain HOLD on Shennan with TP adjusted to RMB115, reflecting 27x 2025E P/E (vs. prev. 30.8x), closed to its 3-yr avg. historical forward P/E.

PCB GPM erosion on higher material costs and greater auto PCB sales. By end market, telecom remained the largest market with c.40% of segment sales in 3Q24. Aside from telecom, datacom/auto/industrial & medical/energy markets contributed ~20%/13%/10%/5% of PCB revenue. GPM declined QoQ due to 1) increasing material costs (i.e., FR4) and 2) auto PCB growth, which has a relatively lower margin than other products. Mgmt. highlighted relatively high utilization rate (~90%) from AI-related PCB production, while that of non-AI production remained at between 85-90%. Looking forward, we expect PCB revenue to grow at 11% in 2025E.

Strong growth in PCBA sales offset substrate weakness. We think the beat in 3Q revenue is mainly due to higher-than-expected PCBA sales, which weighed on margin (down 1.7% sequentially). Substrate business continued to be weak in 3Q due to challenging demand, especially in the consumer electronics market. Substrate (excl. Guangzhou factory) utilization rate maintained at level of c.70%. For Guangzhou factory, mgmt. mentioned mass production capability for sub-16 layered PCB products that have been shipped to a few domestic clients. Looking forward, we expect substrate revenue to grow at 7% in 2025E.

Maintain HOLD, with TP adjusted to RMB115, based on 27.0x rollover 2025E P/E, closed to 3-yr avg. historical forward P/E. We revise up our 2024/25E revenue forecasts by 9%/3%, reflecting higher-than-expected PCBA sales. EPS was up by 7% for 2024E but remained unchanged for 2025E, considering ongoing margin pressure. Potential risks include: 1) weaker-than-expected demand recovery, 2) slower product certification at clients, and 3) slower capacity ramp-up.