Key points of investment

Incident: On October 29, 2024, the company released its results report for the third quarter of 2024. The first three quarters of 2024 achieved operating income of 0.59 billion yuan, yoy -43.1%, net profit to mother of -0.07 billion yuan, and losses increased 0.03 billion yuan year-on-year.

Performance is still under pressure, and asset depreciation is significant. The company achieved operating income of 0.59 billion yuan, yoy -43.1% in the first three quarters of 2024, mainly due to weak downstream markets; achieved gross profit margin of 9.8%, up 3.8 pcts year on year; realized net profit to mother of -0.07 billion yuan, and loss increased 0.03 billion yuan year on year, mainly due to poor revenue and the continuous decline in NAND Flash and DRAM prices. As of Q3, the company's total asset impairment losses were 0.03. The impact of billion yuan on profits is quite obvious.

Looking at a single quarter, the company achieved operating income of 0.17 billion yuan, yoy -47.3%; achieved gross profit margin of 3.84%, a year-on-year decrease of 0.31 pcts, a year-on-year decrease of 8.63 pcts; realized net profit to mother of -0.038 billion yuan, and losses increased 0.021 billion yuan year-on-year, and 0.012 billion yuan month-on-month.

Product+market dual line expansion, sales channels seize acceptance. The company expanded in terms of products and markets: On the market side, the company relied on Lanco's brand advantages to develop wearable devices such as smart audio glasses, Bluetooth headsets, and computer peripheral products such as hubs and hard disk cases, expanding the application areas of the company's products, and ushered in new performance drivers. On the product side, the company actively followed market trends, such as launching the new PCIe 4.0 lightweight solid-state drive NV7000-Q, and began developing a new PCIe 5.0 solid-state drive. At the same time, the company began expanding the DDR5 memory product line to follow the trend of continuous penetration of DDR5, and is expected to continue to maintain a high level of competitiveness.

At the same time, the company is actively following up on market prices, speeding up price strategy adjustments, etc., to assist agents to respond positively to market changes, speed up inventory turnover, and further increase efforts to attract, transform, and promote brands among young consumers. It is also experimenting with new media to expand direct sales channels, which is expected to help the company's performance accelerate and steadily recover.

The active layout of computing power applications is expected to usher in a new impetus for growth. The company plans to cooperate with the Shaoguan Municipal People's Government and ZTE in building a computing power industry ecosystem, improving the level of data center construction, and in-depth cooperation in digital transformation. The company will be responsible for server manufacturing.

Shaoguan is listed as one of the eight largest computing power hubs in the country. It is planned to build 0.5 million standard racks and 5 million servers by 2025, with an investment of over 50 billion yuan (excluding servers and software). As of December 2, 2023, thanks to the Guangdong-Hong Kong-Macao Greater Bay Area, Shaoguan has signed contracts and introduced 59 projects across the computing power industry chain, with a total investment scale of over 200 billion yuan, including leading enterprise projects in the industry such as Huawei, four major operators, Tianyi Cloud, World Data, and Lanco Technology. As the president of the Shaoguan Computing Power Industry Association, Lanco Technology takes on an important role in the “Spatio-temporal Big Data” project, lays out the computing power field in all aspects, and is expected to open up the entire upstream, middle and downstream industry chains.

Investment suggestions: The company is expanding both in storage products and markets, actively broadening sales channels, and laying out the computing power industry chain. We expect the company to achieve revenue of 0.74/1.46/2.18 billion yuan in 2024-2026, respectively, and achieve net profit of 0.07/0.02/0.1 billion yuan. Based on the closing price of October 30, 2024, the corresponding PS is 6.3/3.2/2.1 times, respectively. Maintain a “buy” rating.

Risk warning: the risk of fluctuations in raw material prices; the risk of not being able to continue technological innovation or product updates; the risk of uncertain leasing of Lanco Tower; risk of RMB exchange rate fluctuations