Event Overview: On October 29, Tongfu Microelectronics released its report for the third quarter of 2024. The company achieved revenue of 17.081 billion yuan in the first three quarters of 2024, an increase of 7.38% year on year; achieved net profit of 0.553 billion yuan to mother, reversed losses year on year; realized deducted non-net profit of 0.541 billion yuan, reversing the loss year on year.

Profitability improved significantly in 24Q3. With the recovery of consumer electronics markets such as computing and mobile devices, the company also maintained a steady recovery in performance. 24Q3 achieved revenue of 6.001 billion yuan in a single quarter, up 0.03% year-on-year and 3.5% month-on-month. On the profit side, the company achieved further improvements in profitability in 24Q3. The company's gross margin in the single quarter was 14.64%, up 1.93pct year on year; realized net profit of 0.23 billion yuan, up 85.48% year on year, up 2.68% month on month; deducted non-net profit of 0.225 billion yuan, up 120.59% year on year. Looking forward to the future, the continued recovery of the consumer market and growing demand for computing power; the growth space for industrial chips and automotive chips is still considerable; the company actively explores new customers in the domestic market on the basis of continuing to consolidate leading European and American customers; and the company's continued investment in high-end processors and other product fields to further increase R&D efforts will all drive the company's performance growth in the field of advanced packaging products.

R&D investment continues to improve, and engineering construction continues to expand. The company continues to strengthen research and development of advanced packaging processes. Since this year, the company has launched FCBGA chip packaging technology based on glass core substrates and glass adapter boards to develop high-performance chips in the fields of optoelectronic communication, consumer electronics, artificial intelligence, etc., which helps promote the development of chip packaging technology with high interconnection density, excellent high frequency electrical characteristics, and high reliability. Storage products are the company's key layout direction. Since this year, 16-layer chip stacked packaging products have been shipped in large quantities, and the qualification rate is at the leading level in the industry. In terms of production line construction, construction of a number of major company projects, such as Tongfu Tongke, the Nantong Tongfu Phase III Project, Tongfu Chaowei Suzhou, and Tongfu Chaowei's new plant in Penang, is progressing steadily, making sufficient preparations for future expansion of production.

Major customers have deepened cooperation, and demand for sealed computing power has increased. In 2016, the company acquired 85% of AMD Suzhou and AMD Penang each, forming a close partnership model of “joint venture+cooperation” with AMD. The company's customer AMD's data center business grew more than expected, thanks to strong demand for Instinct GPUs and EPYC processors from cloud customers and enterprise customers. Among them, the MI300 GPU 24Q3 sold more than 1 billion US dollars in a single quarter. AMD's data center GPU revenue this year was 4.5 billion US dollars, compared to 4 billion US dollars previously. As demand for AI chips continues to be strong, advanced packaging production capacity has become one of the bottlenecks in AI chip shipments, and demand for related orders is strong. At the same time, with the increase in innovation opportunities in the AI+ industry, artificial intelligence industrialization has entered a new stage. The company is actively expanding production at the Penang plant in line with the opportunity period requirements of leading customers such as AMD for artificial intelligence development to meet customer needs in all aspects. As AMD's largest sealed testing supplier, the company accounts for more than 80% of its total orders. As cooperation with major customers continues to deepen, the company is expected to benefit from the continued strength of major customers in the field of computing power.

Investment advice: We expect the company's 2024-2026 revenue to be 23.779/28.207/32.962 billion yuan, and net profit to mother of 0.744/1.207/1.673 billion yuan, corresponding to the current PE price, which is 50/31/22 times, respectively. We are optimistic about the company's leading edge in the field of sealing and testing and maintain a “recommended” rating.

Risk warning: downstream demand falls short of expectations; competition in the sealed testing industry intensifies; exchange rate fluctuations.