Incident: On October 29, Tuojing Technology released its report for the third quarter of 2024. In the third quarter of 2024, the company achieved revenue of 1.011 billion yuan, a year-on-year increase of 44.67%; net profit to mother was 0.142 billion yuan, a year-on-year decrease of 2.91%.

R&D investment/new product verification costs are growing rapidly, and gross margins are under pressure in the short term. 1) In terms of R&D investment, the company's R&D investment in the first three quarters of 2024 was 0.481 billion yuan, an increase of 35.73% over the previous year. The main reason was that the company continued to invest in high-intensity R&D, continuously expand new products and processes, and continue to optimize and upgrade equipment platforms and reaction chambers; 2) In terms of gross margin, the company's gross margin for the first three quarters of 2024 was 43.59%, a year-on-year decrease of 6.75%, which is a phased decline, mainly due to the sharp increase in revenue share of new products and processes, and the cost of new products and new processes in the customer verification process is comparable Higher, gross margin declined in stages. However, the company's gross margin is expected to pick up as the new product is verified and converted to mass-produced products.

Orders are plentiful, and performance is expected to grow explosively. In the first half of 2024, the company's shipment amount reached 3.249 billion yuan, up 146.5% year on year. The balance of goods sold was 3.162 billion yuan, an increase of 63.50% over 1.934 billion yuan at the end of 2023. The company's relevant indicators for the third quarter of 2024 continued to grow month-on-month against the backdrop of a high base in the first half of 2024. Inventory for the third quarter of 2024 was 7.077 billion yuan, up 9.64% from the first half of 2024. Contract liabilities were $2.512 billion, up 23.26% from the first half of 2024. It reflects the acceleration of the company's order acceptance rate, and next year's performance is expected to usher in explosive growth.

The proportion of new products increased rapidly, expanding the product matrix. According to the company's 2024 three-quarter report, 1) In the PECVD field, PECVD equipment, as the company's main product, has achieved coverage of a full range of PECVD dielectric film materials. Both general dielectric film materials and advanced dielectric film materials have been industrialized; the company's self-developed PECVD Bianca process equipment has been verified by customers and has received orders for more than 25 reaction chambers. 2) In the ALD field, the first PE-ALD SiN process equipment passed customer verification to achieve industrial application; Thermal-ALD equipment also achieved industrial application. 3) In the SACVD field, the plasma-enhanced SAF film process application equipment launched by the company progressed smoothly in client verification; the SAF film process application equipment developed by the company based on the new platform PF-300T Plus received customer orders and was shipped to the client for verification. 4) In other equipment fields, the company's HDPCVD USG, FSG, and STI film process equipment has all been industrialized, and the cumulative shipment volume of HDPCVD reaction chambers has reached 70; the company's self-developed reaction chambers related to ultra-high depth-to-width ratio groove filling CVD equipment have been shipped more than 15; wafer-to-wafer bonding products and surface pretreatment products before chip-to-wafer hybrid bonding have received repeated orders from customers; bonding accuracy measurement products have been ordered by customers.

Investment advice. As downstream fabs continue to expand production and the company's product coverage increases, we expect the company to achieve revenue of 3.95/5.63/7.22 billion yuan in 24-26, achieve a net profit of 0.66/1.08/1.48 billion yuan, and maintain a “buy” rating of 66/40/29 times PE with a market value corresponding to November 1, respectively.

Risk warning: Downstream demand falls short of expectations; industry competition increases risk; company's new business development falls short of expected risk, etc.