AI server leaders are expected to benefit from increased demand for AI computing power. Maintaining a “buy” rating considering strong demand in the downstream AI server market, we raised the company's net profit forecast for 2024-2026 to 2.41, 3.061, and 3.704 billion yuan (the original forecast was 1.996, 2.376, 2.866 billion yuan), and EPS is 1.64, 2.08, 2.52 yuan/share. The current stock price corresponds to PE 26.7, 21.0, 17.4 times, considering the company as Leading domestic AI servers maintain a “buy” rating.

The performance was in line with expectations, and inventory and accounts payable showed a strong business boom (1) The company achieved operating income of 83.126 billion yuan, an increase of 72.26% year on year in the first three quarters of 2024; achieved net profit due to mother of 1.294 billion yuan, up 67.05% year on year; realized net profit without deduction of 1.155 billion yuan, an increase of 176.67% year on year. Among them, Q3 achieved operating income of 41.062 billion yuan in a single quarter, up 76.05% year on year; realized net profit of 0.697 billion yuan, up 51.09% year on year; realized net profit after deducting non-return to mother of 0.734 billion yuan, an increase of 75.24% year on year. (2) The company's gross sales margin for the first three quarters was 6.70%, down 2.97 percentage points from the previous year. We judge that this was mainly due to the increase in AI server revenue share. The company's sales expense ratio, management expense ratio, and R&D expense ratio were 1.23%, 0.64%, and 2.75%, respectively, down 0.92, 0.45, and 1.76 percentage points, respectively. (3) At the end of the third quarter, the company's inventory increased by 101.47% compared to the beginning of the year, and accounts payable increased by 305.32% compared to the beginning of the year. This was mainly due to the expansion of the company's business scale and increase in operating reserves, which showed that the business was booming. In addition, the company's credit impairment losses increased 163.09% year-on-year in the first three quarters, mainly due to an increase in accounts receivable and a corresponding increase in preparation for bad debts. Credit impairment losses are expected to be recovered as the company's accounts receivable are repaid at the end of the year.

The full-stack capabilities of layout algorithms, computing power, data, and interconnection are promoted at the AI+ implementation algorithm level. The company continues to promote the iteration of the “source” model. The “Source 2.0-M32” open source model launched in 2024 is compatible with EPAI, which can help enterprises implement AI more efficiently; at the computing power level, the company launched a new generation of open accelerated computing server NF5698G7 and a stable and efficient multi-element computing platform; At the data infrastructure level, the company released generative AI storage solutions to meet the large model The application has stringent requirements in terms of storage performance and storage capacity; at the interconnection level, the company launched the Super AI Ethernet Switch X400, which is 1.6 times faster than traditional RoCE networks.

Risk warning: risk of macroeconomic situation fluctuations, risk of technological upgrading, risk of internal governance.