Introduction to this report:

The performance was in line with expectations, maintained high R&D intensity, continued to introduce new developments, and made new progress in the field of automotive-grade chips.

Key points of investment:

Maintain an increase in holdings. The EPS forecast for 2024-2026 is -0.10/-0.04/0.06 yuan. Considering the continuous expansion of the company's product layout and the upward shift in the industry valuation center under the domestic substitution trend, the target price was raised to 23 yuan with reference to the PS valuation of comparable companies, and the target price was raised to 23 yuan.

The year-on-year loss reduction in Q3 in a single quarter was basically in line with expectations, and design EDA grew rapidly. In the first three quarters, the company achieved a 26% year-on-year increase in revenue of 0.279 billion yuan, including a 40% year-on-year increase of 0.192 billion yuan and a 3% year-on-year increase of overseas 0.087 billion yuan. By product, design EDA grew faster. Revenue of 0.111 billion yuan increased 75% year over year, manufacturing EDA revenue of 0.081 billion yuan increased 13% year over year, and semiconductor device characteristic testing systems/technology development solutions achieved revenue of 0.054/0.033 billion yuan respectively. Q3 achieved a 19% year-on-year increase in revenue of 0.083 billion yuan in a single quarter.

In terms of performance, the year-on-year increase in net profit of $-57.16 million in the first three quarters was mainly due to loss of fixed increase investment in Sirup and increased R&D investment. Excluding the impact of share payments, net profit attributable to mother in Q3 — -11.41 million yuan, a year-on-year loss of 9.21 million yuan — is basically in line with expectations.

Maintain high R&D intensity and continue to introduce new products, and take a solid step in the field of automotive-grade chips.

The company's R&D investment of 0.187 billion yuan in the first three quarters increased 25% year over year, accounting for 67.25% of revenue, which was basically the same as year on year, maintaining a high level of R&D intensity. According to the three-quarter report, in September 2024, the company's nanoSpice series products successfully obtained the official certification of ISO26262TCL3 and IEC61508T2, the international standards for automotive-grade functional safety issued by TV North Germany, an authoritative international certification body. The company has a complete analog, digital, and mixed-signal simulation and verification solution that is rare in China, providing a solid simulation foundation for creating a hybrid design process for high-performance computing chips and automotive electronic chips. This certification marks a solid step for Gailun Electronics in the field of automotive-grade chips. In September 2024, the company also released FAR, an automated masking design platform, and Fablitho, an advanced lithography process simulation tool, expanding the manufacturing EDA product category. It also released the new FS800, a next-generation semiconductor parameter analyzer, and LabExpress, an application-driven electrical parameter testing software.

Continue to promote the EDA industry ecosystem, explore and strive to lead industry transformation. In September 2024, the company hosted the IDAS 2024 main forum of the 2nd Design Automation Industry Summit and held the 2024 General Electronics User Conference to jointly understand industry changes, discuss resource integration, explore technological innovation, and jointly create a new EDA industry ecosystem.

Risk warning: slow technology iteration, increased industry competition, domestic substitution falls short of expectations