Incident: On October 30, VeriSilicon released its report for the third quarter of 2024. In the first three quarters of 2024, it achieved operating income of 1.65 billion yuan, a year-on-year decrease of 6.50%; realized net profit to mother of -0.396 billion yuan; and realized net profit deducted from non-mother of -0.422 billion yuan. Among them, in the 3Q24 single quarter, the company achieved revenue of 0.718 billion yuan, a year-on-year increase of 23.60%, a month-on-month increase of 16.96%, and achieved net profit to mother of -0.111 billion yuan.

The industry gradually recovered, and performance continued to improve. VeriSilicon Co., Ltd. is an enterprise that relies on independent semiconductor IP to provide customers with platform-based, comprehensive, one-stop chip customization services and semiconductor IP licensing services.

In the first half of 2024, the semiconductor industry gradually recovered, and the downstream customer inventory situation improved markedly. Thanks to the company's unique business model, the trend of improving operations was maintained in the third quarter of 2024. In the 3Q24 single quarter, the company achieved revenue of 0.718 billion yuan, up 23.60% year on year and 16.96% month-on-month; realized net profit of -0.111 billion yuan to mother, mainly due to the increase in expenses during the period due to the company's insistence on R&D investment. The company will continue to expand leading customers in the industry and lay a solid foundation for future performance transformation. In terms of profitability, the company's 3Q24 gross margin was 40.07%, up 5.28 pcts year on year, and the situation improved.

A global research and development agency to vigorously promote AI scenario applications. Combining future technology and the development direction of related industries, the company carried out key and advanced technology research and development, and established seven R&D centers in Shanghai, Chengdu, Beijing, Nanjing and Haikou, China, and Silicon Valley and Dallas in the US. The main projects currently being developed by the company are: 1) High-performance graphics processor technology: for data centers and GPU-AI computing, supports 16 to 32 tFPFP32 computing power, has 128 to 1536 texel/cycle texture processing capabilities and 32 to 384 pixel/cycle pixel filling capabilities; 2) Video processor technology: for data centers, establishing a new generation of video codec architectures to improve codec quality and performance, and support higher standard video codec formats; 3) Neural network processor technology: Aimed at High-performance AIGC applications on data centers and edge servers, supporting inference and training based on Pytroch and TensorFlow.

Join hands with international giants to cover diverse markets. The company has advanced chip customization technology, rich IP reserves, and long-term experience in serving various types of customers. It has become one of the preferred chip design service partners for system vendors, Internet companies and cloud service providers. The service companies include leading international companies such as Samsung, Google, Amazon, Microsoft, Baidu, Tencent, Alibaba, etc. The unique business model brings close synergy between businesses, and the flexible business model can serve diverse customer groups, and has great market space and potential.

Investment advice: Considering downstream changes, we adjusted the company's performance expectations. We expect the company's net profit to be -0.376/0.002/0.177 billion yuan in 24/25/26, respectively, and the 24/25/26 revenue corresponding to the current PS price is 8.2/6.3/5.0 times, respectively. The company's business synergy effects are gradually showing, or it may have long-term growth potential, maintaining a “recommended” rating.

Risk warning: downstream demand falls short of expectations; market competition intensifies; risk of exchange rate fluctuations.