Announcement summary: The company released its 2024 three-quarter report. The first three quarters achieved revenue of 1.257 billion yuan, a year-on-year decrease of 15.61%, a year-on-year decrease of 0.104 billion yuan, a year-on-year decrease of 14.08%, and net profit after deducting 0.095 billion yuan, a year-on-year decrease of 12.29%.

Revenue continued to grow month-on-month, and increased R&D investment affected short-term profits. The company's 24Q3 revenue for a single quarter was 0.434 billion yuan, down 12.84% year on year, up 4% month on month, net profit to mother was 0.028 billion yuan, down 9.37% year on year, down 33.4% month on month, mainly due to 37.5% increase in R&D expenses and 0.005 billion yuan in accrued asset and credit impairment losses. The company improved the gross profit level by promoting cost reduction and efficiency, and adjusting the product structure and cooperative settlement models for some customers. The gross profit margin for the first three quarters was 17.87%, up 0.63 pct year on year, the period cost ratio was 11.13%, and 1.97 pct year on year. Among them, the sales/management/ R&D expenses ratio was 1.25%/2.32%/8.15%, respectively, up 0.11/0.17/1.72 pct. The net profit margin was 8.24%, up 0.11 pct year on year. The gross profit margin was 18.33%, up 2.42pct year on year, and the cost ratio for the period was 11.93%, down 0.42pct year on year.

Overall, the company's profitability has improved year over year. It is expected to increase further as downstream price competition improves, and the company strengthens the overall planning and transformation of results in R&D.

High-end data center switches are gradually being promoted, and foreign investment is being made to switch chips. The company already has hardware development capabilities for mainstream interface rates, high bandwidth, and large capacity switches in 100G/400G data centers. 2T/8T data center switches are being mass-produced and delivered, and small-batch verification of 12.8T and other product forms is progressing steadily. At the same time, it is expanding COME modules based on domestic CPUs, developing its own white box switches, and promoting related business cooperation in an orderly manner. The company's main customers are leading domestic switch manufacturers such as Xinhua 3, S customers, and Ruijie Networks, which account for more than 90% of total sales revenue, which is expected to fully benefit from the strong demand for downstream 400G and above high-speed switches. In August '24, the company announced that it will jointly invest in Shenzhen Feiling Nanxin with professional investment institutions, focusing on integrated circuits and other fields related to the network communication equipment industry, which is conducive to improving its strategic layout and improving overall competitiveness. Recently, Phillinnanxin has signed an equity transfer agreement with one of the target company's shareholders to transfer 50 million yuan of shares in the company corresponding to the target company's registered capital of 0.07876 million yuan, and has completed an advance payment of 50 million yuan for the share transfer.

Overseas markets have broken through smoothly, and the layout of new directions such as in-vehicle communication products has been increased. The company takes into account the big customer strategy while developing global customers and various types of small and medium-sized customers. Currently, most overseas customers are Japanese and Korean customers, and it has formed stable orders and continuous mass production delivery. The company is expanding next-generation TSN industrial switching, multi-GE (2.5G/5G/10G) electric port switches, 2.5G optical upstream gigabit switches/2.5G optical downlink 10 gigabit uplink all-optical switches, etc. in the switch segment. At the same time, with years of accumulated experience in the field of network communication equipment to expand automotive electronic products, the 2024H1 has completed mass production and delivery of automotive vehicle networking T-Box and automotive intelligent control display products. It will increase investment in R&D and design of smart cockpits and domain controllers. Investment in R&D of products such as intelligent networking, high-speed data interaction, in-vehicle high-speed intelligent gateways, and telematics networking terminals.

Investment advice: Phillincox is a leading domestic network equipment ODM leader. It has closely cooperated with leading brands such as Xinhua 3 and S customers. It is expected to benefit from new opportunities for network equipment market development brought by AI and the digital economy to accelerate product iteration into high-end fields such as high-speed switches. Considering the recovery in downstream demand, changes in the settlement model for some of the company's products, and the increase in R&D investment, we adjusted the profit forecast. Net profit for 2024-2026 is 0.163 billion/0.217 billion/0.282 billion yuan (the original forecast value was 0.172 billion/0.231 billion/0.301 billion yuan), and EPS was 2.36 yuan/3.13 yuan/4.06 billion yuan, respectively, maintaining the “buy” rating.

Risk warning: risk of downstream demand falling short of expectations; risk of customer concentration; increased risk of market competition; risk of product development and technological innovation; risk of untimely research information updates