Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 6.775 billion yuan, an increase of 35.05% over the previous year; realized net profit to mother of 0.279 billion yuan, an increase of 771.94% over the previous year; and realized deducted non-net profit of 0.179 billion yuan, which significantly reversed losses over the previous year. In 2024, Q3 achieved operating income of 2.377 billion yuan, up 16.12% year on year and 9.56% month on month; net profit to mother was 0.092 billion yuan, up 21.60% year on year, down 14.68% month on month; after deducting non-net profit of 0.085 billion yuan, up 293.02% year on year, up 126.68% month on month.

The capacity utilization rate remains high, and profitability has improved dramatically: with the gradual recovery of industry prosperity, the company's production capacity has continued to be at full capacity since March of this year, and OEM prices for some products have been adjusted since June of this year, which has helped the company to steadily increase its operating income and product gross profit level. The company's comprehensive gross margin for the first three quarters of 2024 was 25.26%, up 6.64 pcts year on year; net margin was 4.37%, up 5.67 pcts year on year. In terms of expenses, the company's sales, management, R&D, and financial expenses for the first three quarters of 2024 were 0.61%/3.64%/13.75%/3.87%, respectively, with year-on-year changes of -0.11/-0.20/-1.46/+1.91pcts, respectively.

Benefiting from the recovery of the industry and the acceleration of domestic substitution, CIS production capacity continues to be at full capacity: according to Canalys data, global smartphone shipments increased 5% year-on-year in Q3 of 2024, achieving growth for four consecutive quarters; at the same time, according to IDC forecast data, the semiconductor market is expected to resume its growth trend in 2024, benefiting from the gradual recovery in smartphone demand and strong demand for artificial intelligence chips, with an annual growth rate of more than 20%. Benefiting from the recovery in the smartphone and semiconductor industry, the company's middle- and high-end CIS downstream demand is strong, and the CIS business has achieved rapid development. In 2024, DDIC, CIS, PMIC, MCU, and Logic accounted for 68.53%, 16.04%, 8.99%, 2.44%, and 3.82% of the main business revenue, respectively. Among them, CIS accounted for a significant increase in the proportion of main business revenue, making it the company's second largest product spindle. The company said that in 2024, with the acceleration of CIS localization and substitution, the company closely follows the development trend of the industry and continues to adjust and optimize the product structure; the company's CIS production capacity is at full capacity, and the subsequent company will focus on expanding CIS production capacity according to customer needs.

28nm OLEDs are expected to be mass-produced in the 25th year, and silicon-based OLEDs enable long-term development: the company always attaches great importance to product research and development, continues to increase investment in R&D, focuses on core technology, keeps up with trends in traditional fields and emerging markets, plans and develops richer process platforms, and continues to promote the development of advanced nodes in mature processes. At present, the company's 40nm high-voltage OLED chip process platform has achieved small-batch production. The 28nm logic chip has passed functional verification, and the 28nm OLED driver chip is expected to be mass-produced in the first half of 2025. At the same time, the company's annual report shows that according to the forecast of the Chinese Academy of Information and Communications Technology, the average annual growth rate of the global AR/VR industry in 2020-2024 is about 54%, and the global AR/VR market is expected to reach 480 billion yuan in 2024. Currently, AR/VR micro display technology mainly uses two micro display solutions: LCoS (liquid crystal on silicon) and OleDOS (organic light emission on silicon). Mini/Micro LED inherits the advantages of OLED, and has better performance in terms of miniaturization, low power consumption, high color saturation, and response speed. At the same time, it has a longer service life than OLED, which can basically meet all the technical requirements of AR/VR for micro displays, so Mini/Micro LED is expected to become the next generation of mainstream display technology.

In the field of AR/VR micro displays, the company is developing silicon-based OLED-related technology, and has developed in-depth cooperation with leading domestic panel companies to accelerate application implementation. In the future, as the AR/VR market continues to expand and the company makes breakthroughs in silicon-based OLED technology research and development, the company is expected to further open up room for performance growth.

Maintaining a “buy” rating: The company is mainly engaged in the 12-inch wafer foundry business and provides 150nm to 90nm foundry services. The main products it manufactures are panel display driver chips, which are the leading pure wafer foundry companies in the industry. Since 2023, the company's R&D projects have progressed smoothly, and 55nm TDDI products have achieved large-scale mass production. The 40nm high-voltage OLED platform was mass-produced in small batches in Q2 in '24; 110nmDic has completed AEC-Q100 vehicle grade certification and passed the customer's 12.8-inch display assembly reliability test. Along with the recovery in consumer electronics demand, the DDIC and CIS industry continues to rise, and the company's production capacity remains at full capacity, driving the company's gross margin to gradually recover. At the same time, as the company continues to make breakthroughs in the development of advanced processes and new technology process platforms, and the steady progress of advanced CIS production capacity expansion projects, the company is expected to further open up incremental markets such as new displays and automotive electronics. However, considering that the company's R&D investment remains at a high level, putting some pressure on the profit side, and taking into account the company's three-quarter financial report, the profit forecast for 2024 and 2025 was lowered. The company's net profit for 2024-2026 is estimated to be 0.504 billion yuan, 0.858 billion yuan, 1.476 billion yuan, EPS 0.25 yuan, 0.43 yuan, and 0.74 yuan respectively, and PE is 84X, 49X, and 29X respectively.

Risk warning: Risk of demand recovery falling short of expectations; risk of high customer concentration; risk of exchange rate fluctuations; increased risk of industry competition.