Description of the event

Communication Holdings recently released its report for the third quarter of 2024. 2024Q3 achieved revenue of 16.693 billion yuan, a year-on-year decrease of 7.22%; realized net profit of 1.051 billion yuan, a year-on-year decrease of 41.02%; deducted non-net profit of 0.82 billion yuan, a year-on-year decrease of 52.72%; and gross margin of 21.72%, a year-on-year decrease of 3.5 pct. In the first three quarters of 2024, the company achieved revenue of 51.252 billion yuan, a year-on-year increase of 19.13%; realized net profit to mother of 3.903 billion yuan, an increase of 0.50%; realized deducted non-net profit of 3.248 billion yuan, a year-on-year decrease of 7.44%; and gross margin was 21.59%, a decrease of 3.2 pct year-on-year.

Incident comments

Gross margin improved month-on-month, and cost pressure decreased. 2024Q3's gross margin was 21.72%, up month-on-month. Gross margin is affected by a combination of factors such as the competitive landscape, cost changes, and the company's price strategy. The price pressure on upstream components is being reduced, and in the future, the company will also adjust according to dynamics such as cost changes and market competition to maintain a reasonable level of gross margin.

Keep up with market trends and create a diversified product matrix. At the smartphone product level, with increasing attention to folding screen phones, in August 2024, TECNO, the company's innovative technology brand, released the PHANTOM Ultimate 2, an ultra-light and thin three-fold concept model, the new pioneer in the PHANTOM Ultimate concept model series. Previously, the company released the PHANTOM Ultimate, a scroll-screen concept phone. In terms of AI, the company actively explores large models and interconnection technology, and has built an architecture that enables multi-terminal integration and interoperability, AIOS system-level application reconstruction, AI end-side applications, and AI cloud-based collaborative applications. The company released TECNO AI, bringing a new generation of smart assistant Ella and innovative interactive experience, focusing on key user scenarios, using AI to enhance scenarios such as imaging, communication, office efficiency and creativity, developing a series of AI assistive function applications and continuing to iteratively promote the full AI transformation of the system to enhance the mobile experience of users' smart devices. Since September 2024, the company's brands have released a variety of mobile phones equipped with AI functions, including the PHANTOM V Fold2 5G, the second-generation folding screen flagship in the PHANTOM series. The product is equipped with a new TECNO AI, with a series of AI functions including real-time call translation, AI wallpaper, AI image cancellation, AI cutout, and recording to notes.

The growth logic is clear, and I am optimistic about the company's competitiveness and long-term growth space. The company has built solid operating barriers in emerging markets, and the competitive pattern is clear. Smartphone sales still have plenty of room for growth. As the market recovers, the company is also expected to surpass the industry's growth rate. In the long run, Voice is the leading hardware and internet leader, and it is expected to develop a deeper level of diversified monetization of content terminals on the basis of OS monetization. And the company's co-creation and share+Glocal soft power will help the company maintain high long-term growth. Net profit due to mother is expected to be 5.43 billion yuan, 6.58 billion yuan, and 7.62 billion yuan in 2024-2026. The PE corresponding to the current stock price is 20x, 17x, and 14x, respectively, maintaining a “buy” rating.

Risk warning

1. Consumer electronics demand is uncertain;

2. There is uncertainty about the pace of new market expansion.