3Q24 results fell short of our expectations

USI Electronics announced 1-3Q24 results: operating income of 44.007 billion yuan, a year-on-year increase of 2%, and net profit to mother of 1.297 billion yuan, a year-on-year decrease of 7%. Corresponding to the 3Q24 single quarter, USX achieved operating income of 16.621 billion yuan, a year-on-year increase of 3%, and net profit to mother of 0.513 billion yuan, a year-on-year decrease of 18%, lower than our expectations. We believe that the performance of USX 3Q24 is under pressure, mainly due to: 1) the significant depreciation of the 3Q24 dollar, putting pressure on USI's gross margin and financial expenses; 2) the expansion of the company's asset acquisition business, which led to a slight increase in operating expenses; 3) competition in the supply pattern of major North American customers intensified, leading to pressure on the gross margin of the company's related business.

By business, Huan Xu in a single quarter of 3Q24:1) The communications business achieved revenue of 5.685 billion yuan, an increase of 3.2% year on year. We believe that the main reason was the year-on-year increase in the number of new machine shipments from North American customers, adding camera control buttons to increase the value of USI's stand-alone machines; 2) The consumer electronics business achieved revenue of 5.931 billion yuan, a decrease of 0.4% year on year. We think the main reason is that the North American customer's new watch product performance is weak, causing the company's related business to be under pressure; 3) Industrial/Cloud and Storage/Automotive Electronics/Medical business revenue is on the same basis. 9.2/+16.3/+17.6/ -20.8% to 17.50/1.496/1.487/0.079 billion yuan.

Development trends

Apple will introduce self-supplied baseband chips in 2025, and the value of USI is expected to increase. USI's communications business is mainly SiP packaging for communication, WiFi, and UWB related chips. We expect Apple to introduce self-developed baseband chips in some SE and 17 series models in 2025. As the core supplier of communication-related modules, USI is expected to increase ASP, increase the complexity of superposition packaging, and improve profitability slightly. Furthermore, we are optimistic that as the trend of AI terminal upgrades becomes clear and the internal structure of mobile phones and other terminals gradually becomes crowded, USX is expected to develop customers for terminal brands other than Apple and drive steady growth in performance.

The growth trend of the cloud and storage business and the automotive business is improving. USX's cloud and storage business mainly participates in services such as server motherboards, high-speed switches, and SSDs, fully benefiting from the demand for AI servers and ordinary servers. Furthermore, we are optimistic about USX's global production capacity layout and JDM service model, which is expected to participate in the complete machine requirements of server customers and drive the continued growth of related businesses. In the automotive business, USI achieved steady growth through the acquisition of Tyco's antenna business, and continued to enrich customer resources with products such as the original Power Module and Power Train to help grow revenue and profits.

Profit forecasting and valuation

Considering the increase in cost rates and increased competition from major North American customers during the period, we lowered the 2024/25eEPS by 24/ 14% to 0.80/1.04 yuan, corresponding to 2024/25e 19.1/14.8x P/E. Considering the market's expectations for changes in USX's performance and competitive landscape, we maintain a target price of 19.0 yuan, corresponding to 2024/25e 23.7/18.3x P/E, with room for increase of 24% compared to the current one.

risks

Shipments of downstream products in the communications and consumer electronics business fell short of expectations; growth in the automotive, cloud and storage businesses fell short of expectations.