Key points of investment:

The company's performance grew rapidly in the first three quarters of 2024. In the first three quarters of 2024, the company achieved operating income of 5.395 billion yuan, a year-on-year increase of 67%, and achieved net profit to mother of 0.557 billion yuan, an increase of 184% year-on-year. After deducting non-net profit of 0.547 billion yuan, an increase of 187% over the previous year, the company's performance grew rapidly. The company focuses on the main product lines of “cloud-edge-end” smart storage and smart IoT, and continues to launch competitive products and upgrade its business model to provide cloud platform services. The company independently develops a variety of storage master control chips, combines self-developed firmware solutions and mass production tools to provide customers with storage products in the form of storage modules, while entering enterprise-level storage and continuously increasing integrated software and hardware investment; in terms of smart IoT business, the share of cloud video platform business and overseas smart security business has increased, increasing the company's overall gross margin. At the same time, the company promotes the layout of the server remanufacturing industry chain with steady profitability.

Based on AIoT and cloud services, the server remanufacturing business is comprehensively laid out. The company's main business direction is R&D, production and sales of IoT smart terminals and intelligent storage terminals. The main products include IoT smart terminals: smart cameras, smart doorbells, solar cell cameras, pet cameras, etc.; connected car smart terminals: smart rearview mirrors, driving recorders, etc.; smart wearable terminals: smart watches, smart bracelets; smart cleaning: sweepers, moppers, etc.; smart education terminals: reading pens, translators, smart desk lamps; cloud gaming terminals: cloud gamepads, projectors, and smart storage devices: mechanical hard drives, solid state drives and NAS memories. In terms of the server remanufacturing business, Semsotai North Inc., the holding subsidiary of the company, carries out server recycling and dismantling in North America, and through Co-Creation Data Shenzhen Yantian Branch and Co-Creation Data Bonded Division, it purchases equipment and materials for use in servers from Semsotai North Inc. and provides server related technology and maintenance services.

With the advent of the AIGC era, the data storage market has great potential. According to the company's Investor Relations Activity Record Form (20240105), in the AI AIGC big data era, as more and more application information is transformed into data storage and processing, the importance and value of data is getting higher and higher, and the data storage industry is facing unprecedented challenges and opportunities. The rapid development of AI cloud computing has also created a new demand for high-performance storage servers. The company has a complete product line on the SSD product side. In particular, enterprise-grade SSDs with high-speed computing performance, better reliability, larger single disk capacity, and higher service life are an important competitive advantage of the company in the industry.

Smart IoT terminals are combined with cloud platforms to form a “cloud edge” integrated product layout. The company continues to improve the service capabilities of cloud platforms, increase R&D investment in data computation, data storage, device connectivity, etc., provide multi-scenario smart terminals and cloud services, and launch value-added applications including AI intelligent push, data storage and management, user usage habits analysis, user visualization applications, and intelligent video analysis, determining the value-added revenue capabilities of smart terminal products.

Card slots in the server remanufacturing business build a solid barrier. The company successively established Co-Creation Data Shenzhen Yantian Branch and Co-Creation Data Bonded Branch in the second half of 2023 to carry out server remanufacturing business. Overseas recycling of servers requires multiple qualifications, and companies with early layout are expected to gain a card position advantage; rely on strong supply chain management advantages to achieve large-scale production of server remanufacturing; and rely on high R&D investment and technological development to achieve a high profit rate of the whole machine and create a core competitive advantage.

Downstream customer resources are abundant. The company mainly uses cooperative R&D and manufacturing (JDM) and independent design and manufacturing (ODM) models for customer support and services. At present, we have established long-term and stable cooperative relationships with well-known technology companies such as Lenovo Group, Xiaomi Ecosystem Company (Chuangmi Technology), Anke Innovation, 360 Group, NetEase Youdao, Ring (US), Noise (India), 3-Plus (US), LG (South Korea), and Buffalo (Japan).

Profit forecasting and investment advice. We believe that the company is deeply involved in the field of consumer electronics and continues to deepen the strategic layout of the three core industries of smart storage, cloud video business, and intelligent manufacturing. With a focus on improving quality and efficiency, our 23-year performance has grown rapidly. The current AIGC era is rapidly arriving, and demand for data storage is growing rapidly, which will strongly drive the rapid growth of the company's storage business. We assume that the company's server remanufacturing business is growing rapidly, and that the data storage business is growing rapidly along with strong downstream demand, with growth rates of 70%, 38%, and 28% respectively in 24-26; the IoT business has further enriched customer coverage and achieved steady and rapid growth, with growth rates of 20%, 18%, and 15% respectively in 24-26; other businesses maintain rapid growth levels, with growth rates of 42%, 30%, and 28% for 24-26, respectively. At the gross margin level, the data storage business assumes an increase in gross margin due to factors such as price increases in the industry, and is given 13%, 13%, and 13% respectively for 24-26; the gross margins of the IoT business and other businesses have maintained a stable trend.

We expect the company's revenue for 2024-2026 to be 7.111/9.433/11.815 billion yuan, respectively, and net profit to mother of 0.655/0.917/1.188 billion yuan, respectively, and EPS of 2.67/3.74/4.84 yuan respectively, giving a dynamic PE25-30 times in 2024, with a 6-month reasonable value range of 93.44-112.13 yuan, for the first time coverage.

Risk warning. The growth rate of the data storage equipment business falls short of expectations; the risk that the IoT business expansion falls short of expectations; and industry policy risks.