Event: Wave Information released its 2024 three-quarter report. The company achieved operating income of 83.126 billion yuan in the first three quarters, up 72.26% year on year; net profit to mother was 1.294 billion yuan, up 67.05% year on year; net profit after deducting non-return to mother was 1.155 billion yuan, up 177% year on year.

Single Q3 profit improved significantly from month to month. The company achieved revenue of 41.062 billion yuan in 3Q24, up 76.05% year on year and 67.89% month on month; it is expected to achieve net profit of 0.697 billion yuan, up 51.09% year on year and 139% month on month. In the third quarter, the company's AI server products entered the peak delivery period, and the business scale expanded rapidly, thus achieving a rapid increase in revenue and profit. Short-term loans increased 93% from the end of the second quarter, mainly due to the expansion of the company's business scale, increased capital requirements, and a corresponding increase in the scale of financing.

Net interest rates improved month-on-month. The company's net sales margin for 3Q24 was 1.71%, down 0.3 pct year on year and up 0.56 pct month on month. Specifically, the company's 3Q24 gross margin was 5.62%, down 2.2 pct year on year, mainly because the company shipped AI server products in batches in the third quarter, and the gross margin was lower than that of general-purpose servers, putting pressure on the company's gross margin; in terms of expenses, the company's 3Q24 sales/management/R&D expenses ratio was 0.81%/0.55%/2.24%, respectively, down 0.74/0.04/0.95pct year on year, mainly due to the increase in the company's revenue scale and scale effect. The company's accounts receivable increased dramatically. Accounts receivable at the end of the third quarter were 23.77 billion yuan, up 74% from the end of the second quarter; it also caused a credit impairment loss of 0.407 billion yuan. It is expected that this loss will be recovered after AI server products are delivered and repaid.

Inspur Information released a new generation of server products. On October 24, the company released Meta Brain? The eighth-generation server computing power platform. The same architecture supports Intel? Xeon? 6 processor and AMD EPYC?

The 9005 series processor can better support AI large model development and application innovation. In the llama2 large model AI inference scenario, the performance of the whole machine is up to 3 times higher than the previous generation. In the latest evaluation by SPEC, an authoritative international standard performance evaluation organization, the new product won first place in many tests such as SPEC CPU, SPEC jbb, and SPEC Power. The flagship product NF5280G8 also broke the best records for the SPEC CPU performance and SPEC Power energy efficiency tests. Compared with the previous generation platform, the performance record was increased by 24% and the energy efficiency record was increased by 20%, achieving the highest performance and energy efficiency record. The launch of the new product will solidify Wave Information's leading position in the server market.

Investment advice: We expect the company to achieve revenue of 101.2/119.2/130.2 billion yuan and net profit to mother of 2.32/3.01/3.66 billion yuan in 2024-2026, corresponding PE of 28x/22x/18x respectively. Maintain a “buy” rating.

Risk warning: There is a shortage of upstream chip supply; downstream customer capital expenditure falls short of expectations; industry competition intensifies; and there is a risk that the company's market share will decline due to fluctuations in upstream AI chip shipment share.