Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 5.178 billion yuan, +49.91% year over year; realized net profit to mother of 0.149 billion yuan, or -37.37% year on year; realized deducted non-net profit of 0.122 billion yuan, or -43.51% year over year. Looking at a single quarter, 24Q3 achieved operating income of 1.865 billion yuan, +11.14% year over month; net profit to mother 0.05 billion yuan, -55.51% year on year, +26.37% month on month; deducted non-net profit of 0.042 billion yuan, -60.57% year on year and -3.68% month on month.

High year-on-year revenue growth, under pressure on profitability: In the first three quarters of 2024, the company's revenue grew at a high year-on-year rate, mainly due to high year-on-year growth in overseas business and automotive electronics business. The biggest contributor to revenue comes from the consumer electronics sector represented by mobile phones, accounting for about 70% of revenue, and automotive electronics also accounts for 20% of revenue.

The company's profit side was under pressure in the first three quarters of 2024, mainly due to: 1) the business model changed, and the share of the business model requiring procurement of raw materials for customers was constantly increasing; 2) the company was actively developing emerging businesses, including automotive electronics, continuously increasing investment in infrastructure, marketing, R&D, management, etc., increasing costs in the short term. 24Q3's gross margin was 11.48%, -6.06 pcts year on year, -0.11 pct month on month; net margin was 3.91%, -4.09 pcts year on year, +0.81 pcts month on month. In terms of expenses, the 24Q3 company's sales, management, R&D and financial expenses rates were 0.25%/4.65%/1.84%/0.21%, respectively, -0.07/+0.05/-0.37/+0.13pct.

Consumer electronics continued to recover, and the company actively expanded production to help growth: According to IDC data, the Chinese smartphone market shipped about 68.78 million units in 24Q3, up 3.2% year on year, and maintained year-on-year growth for four consecutive quarters.

The arrival of a new rotation cycle has made market demand continue to improve. Manufacturers such as Vivo, Huawei and Xiaomi performed well in the market, driving 3.8% year-on-year growth in the Android market. Among them, Huawei and Xiaomi mobile phone shipments increased by 42% and 12.8%, respectively. We believe that benefiting from the continued recovery in industry demand, the company's consumer electronics business is expected to grow rapidly as shipments from leading domestic customers continue to grow. Currently, the company's capacity utilization rate is at a high level, and new and old projects from various customers are being launched and delivered one after another. As demand for various orders, including mobile phones, grows, the company is stepping up production capacity investment at various bases at home and abroad to meet customer needs.

Currently, the company has manufacturing bases in Huizhou, Jiaxing, and overseas in India, Bangladesh, and Vietnam, and can provide customers with manufacturing services for more than 0.1 billion smartphones or similar electronic products every year. The Shenzhen Pingshan base currently under construction is expected to provide the company with a manufacturing capacity of about 40 million smart terminals or similar electronic products every year after completion and production in 2025.

Automotive electronics grew rapidly, and the second growth curve opened up room for growth: with the rapid development of the automotive electronics market, the company's share of automotive electronics also continued to increase. The 24H1 automotive electronics business revenue was 0.709 billion yuan, +250.45% year-on-year, accounting for 21.41% of revenue. In the field of automotive electronics, the company has successfully entered the supply chain systems of well-known auto parts suppliers Valeo, Continental, and Nippon Denso to provide customers with automotive electronic components such as various sensors, car driving data recording systems, smart cockpit hardware, power management systems, etc., which are widely used in well-known domestic and foreign automobile brands including BMW, Audi, Volkswagen, Tesla, Nissan, and Geely. The company also has deep cooperation with new car builders Huawei and Xiaomi in the automotive electronics business.

According to the official account of Hongmeng Zhixing, in September 2024, the entire Hongmeng Zhixing series delivered 3,9931 new cars, ranking in the TOP1 average sales price of Chinese automobile brand terminals for 5 consecutive months. According to Xiaomi's 2024 annual report, the Xiaomi SU7 series delivered 27,307 new vehicles in 24Q2. The trend of electrification and intelligence in the automotive industry is clear and irreversible, and domestic and foreign car companies are undergoing related evolutions. At the same time, automotive electronics is a long-term product category, and customers are stable and deterministic. The company provides manufacturing services for various automotive electronics-related products to many well-known customers in the automotive sector. We believe that the company's automotive electronics business will continue to grow rapidly. As its share of revenue gradually increases, it will become the second growth curve for the company's future development.

Maintaining a “buy” rating: Industry demand continues to recover and the consumer electronics boom continues to rise. We are optimistic that the company's consumer electronics business will benefit from increased sales of domestic mobile phones such as Huawei, Honor, and OV Mi, and shipments are expected to continue to grow at a high rate. Production lines are running at full capacity, and production capacity at domestic and foreign production bases is being released in an orderly manner. Second growth curve The automotive electronics business continues to grow rapidly, which is expected to drive steady growth in the company's performance. Since the Android smartphone market continued its weak recovery trend in 2024, the growth rate fell short of our expectations, and the company's share of non-customer supply business continued to rise, reducing the company's gross profit margin. In addition, the company had large expenses in the short term to expand new businesses such as automotive electronics, putting some pressure on the profit side in the short term. Therefore, we lowered our profit forecast and estimated that the company's net profit from 2024 to 2026 was 0.22 billion yuan, 0.25 billion yuan, 0.33 billion yuan, EPS 0.29 billion yuan, and 0.33 billion yuan, respectively. 0.33 yuan, 0.43 yuan, corresponding PE is 120X, 106X, 80X, respectively.

Risk warning: the risk of fluctuations in the international political and economic situation, downstream demand falling short of expectations, new business expansion falling short of expectations, and the risk of rising labor costs.