The company announced third-quarter results: revenue of 6.001 billion yuan, up 0.04% year on year, up 3.50% month on month; net profit to mother 0.23 billion yuan, up 85.32% year on year, up 2.53% month on month. In the first three quarters, the company achieved revenue of 17.081 billion yuan, or 7.38% year-on-year; net profit to mother was 0.553 billion yuan, an increase of 0.616 billion yuan over the previous year. The company continued the rapid year-on-year trend of net profit growth in the third quarter. The main reasons were: 1) the recovery in terminal demand drove an increase in the company's comprehensive capacity utilization rate and a steady increase in revenue; 2) the company continued to reduce costs and increase efficiency, and cost control, and the company's efficiency improved markedly. We are optimistic that the company will cooperate deeply with AMD, a major overseas customer, in the medium to long term to seize the structural growth of AI, while continuing to develop markets in the fields of storage, display drivers, automobiles, etc., and maintain the purchase rating.

3Q24 review: Some domestic low-end products affect gross profit margins, but net profit is still growing rapidly compared to the beginning of the year, downstream semiconductor demand has maintained a recovery trend. The company's major overseas customers have continued to advance into the high-end field, and the company continues to deepen the “joint venture+cooperation” strong joint model. The company's Q3 capacity utilization rate maintained an upward trend, and the revenue contribution of high-end products continued to increase, driving Q3 revenue to achieve 3.50% month-on-month growth. As sealed prices for some domestic low-end categories were affected by increased competition, the company's Q3 comprehensive gross margin fell 1.36pct month-on-month to 14.64%. However, under the company's continued cost reduction and efficiency measures and cost control measures, Q3 gross margin increased by 1.93 pct year on year, and net profit from Q3 increased steadily from month to month, achieving rapid year-on-year growth. We are optimistic that the company's subsequent performance will continue to improve year over year.

Future outlook: The company continues to benefit from an increase in AMD's share, and its indirect investment in AAMI's optimized supply chain AMD products continues to gain market recognition, and its market share continues to increase in data centers, laptops, desktops, etc. According to Mercury Research, 2Q24 AMD's global market share in data centers and notebook computers was 24.1% and 20.3%, respectively, up 5.6 pcts and 3.8 pcts year over year, respectively.

As AMD's main testing partner, we believe Tongfu will continue to benefit from AMD's increased share in the core market in the future. The company signed a “Partnership Share Transfer Agreement” with Leading Semiconductors on October 16 to indirectly take a stake in AAMI, the world's leading lead frame supplier. Lead frames are one of the core raw materials for the sealing and testing business. We believe this move will help the company improve supply chain stability and optimize costs.

Target price is 31.29 yuan, maintaining a “buy” rating

Due to price pressure in some low-end domestic sectors, the company's gross margin recovery was slightly lower than our previous expectations. As a result, we lowered the company's 2024/2025/2026 net profit forecast of 22%/7%/7% to 0.758/1.148/1.599 billion yuan, corresponding EPS of 0.50/0.76/1.05 yuan. Based on the 25-year BPS of 10.43 yuan, the 25-year PB valuation was given (comparable to the average expected average value of 2.6x for the company Wind, which is mainly due to the company's domestic leadership in advanced packaging and its preemptive layout in various fields), the corresponding target price is 31.29 yuan, maintaining a “buy” rating.

Risk warning: Risk of a downturn in the semiconductor cycle; performance falls short of expectations due to weakening demand from core customers.