Incident: On October 26, Mulai Optics released its 2024 three-quarter report. In the third quarter of 2024, the company achieved revenue of 0.134 billion yuan, up 11.25% year on year; net profit to mother was 0.009 billion yuan, up 15.76% year on year; net profit after deducting non-return to mother was 0.007 billion yuan, up 51.69% year on year.

Semiconductor business revenue is growing, and demand in the bioscience and medical sectors is slowing. From January to September 2024, the company's total revenue was 3.75 yuan, an increase of 4.33% over the same period last year. Among them, the semiconductor sector accounted for 48.60% of revenue, life sciences for 22.28%, driverless cars for 6.65%, biometrics for 6.44%, AR/VR testing for 4.74%, aerospace for 1.81%, and others for 9.48%. The increase in the company's revenue was mainly due to the increase in revenue in the semiconductor sector. Furthermore, revenue in the aerospace sector increased significantly compared to the same period last year. AR/VR testing revenue declined compared to the same period last year, mainly due to the long product delivery cycle, and some orders have yet to generate revenue. The company is in close communication with downstream customers in the AR field and is working together to upgrade the product. The decline in revenue in the life sciences and healthcare sector is due to downstream customers being impeded by overseas marketing progress and inventory cycles, leading to a slowdown in demand.

Gross margin had fluctuated before, and stopped falling and rebounded in Q3. From January to September 2024, the company's gross margin was 48.15%, down 3.13 pcts from the same period last year and 0.48 pcts higher than 2024H1. The main reasons are: 1) the company's product structure changed significantly over the same period, and the share of product revenue in life science applications decreased compared to the same period last year; 2) the number of production personnel increased, and overall employee remuneration increased over the same period; 3) successive investment in related production plants and testing equipment increased depreciation and utility expenses. The gross margin of the 24Q3 company was 49.01%, up 2.88pcts from 24Q2, and there was a marked recovery.

Semiconductors have become the company's core business, and related R&D is progressing smoothly. From January to September 2024, the semiconductor sector accounted for 48.60% of the company's revenue. Compared with 37.05% in 2023, semiconductors have become the core business of the company's future development. At the same time, the company's products are progressing smoothly in the field of lithography machines and other fields. According to the 2024 semi-annual report, research on high-precision optical device processing and inspection technology for the company's lithography machine lighting system is in the stages of principle research and process design, reaching domestic leadership in terms of technical level.

Investment advice. With the gradual growth of the company's semiconductor business and driven by downstream demand, we expect the company to achieve revenue of 0.54/0.65/0.75 billion yuan in 24-26, achieve a net profit of 0.05/0.06/0.09 billion yuan, and maintain a “buy” rating of 224/180/132 times PE corresponding to the market value on November 3, respectively.

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