Key points of investment

Revenue from high-end products increased & management and cost control was strengthened, and the results for the first three quarters of 2024 turned a year-on-year loss into a profit. In the first three quarters of 2024, the company's cumulative revenue was 17.081 billion yuan, up 7.38% year on year, of which the 2024Q3 company's revenue was 6.001 billion yuan, up 0.04% year on year and 3.50% month on month; in the first three quarters of 2024, the company's cumulative net profit to mother was 0.553 billion yuan, turning a year-on-year loss into profit (the company's net profit to mother for the first three quarters of 2023 was -0.064 billion yuan), of which the 2024Q3 company's net profit to mother was 0.23 billion yuan billion yuan, up 85.32% year over year, up 2.53% month on month. Mainly in the first three quarters of 2024, the semiconductor industry showed an overall recovery trend. The company was aggressive, capacity utilization increased, and operating income increased. In particular, the operating income of high-end products increased markedly.

At the same time, thanks to strengthened management and cost control, the company's overall efficiency has improved significantly. In the first three quarters of 2024, the company's financial expenses were 0.375 billion yuan, down 49.14% year on year, mainly due to a sharp reduction in exchange losses; interest income was 0.066 billion yuan, up 81.70% year on year, mainly due to the company's strengthened fund management and increased deposit income; other revenue was 0.14 billion yuan, up 64.40% year on year, mainly due to government subsidies confirming other income.

It is proposed to invest 0.2 billion yuan to indirectly hold AAMI shares to improve the stability and security of the company's supply chain. Tongfu Microelectronics invested 0.2 billion yuan to transfer Chuzhou Guangtai's 0.147 billion yuan investment (31.90% of Chuzhou Guangtai's partnership share) held by Leading Semiconductors to indirectly hold shares in lead frame supplier AAMI. Chuzhou Guangtai is the upper shareholder of AAMI. The essence of the company's current investment is to indirectly hold shares in lead frame supplier AAMI. AAMI specializes in the design, R&D, production and sales of lead frames. A lead frame is an important semiconductor packaging material. It uses bonding materials to electrically connect the lead end of the chip's internal circuit to the outer lead wire to form an electrical circuit, and acts as a bridge for connecting to external wires, and is used in most semiconductor products. AAMI has been deeply involved in the field of lead frames for more than 40 years. It has advanced production technology, excellent technical level and strong R&D capabilities. It has accumulated rich product layout, technical reserves and customer resources, and has a strong competitive advantage in high-end application markets such as high precision and high reliability. Its products are widely used in automotive, computing, industrial, communication and consumer semiconductors, and have been highly recognized by leading customers in various segments. It has established stable cooperative relationships with the world's top semiconductor IDM and packaging and testing foundry companies. After the transaction is completed, the company will directly hold Zhizheng shares and will continue to indirectly hold AAMI shares. While further improving the stability and safety of the company's supply chain, Zhizheng shares have higher liquidity, which helps the company achieve investment returns and conforms to the company's interests and development strategy.

Investment advice: Taking into account the weak recovery of semiconductors and the company's financial information for the third quarter, we adjusted the company's original expectations.

The estimated revenue from 2024 to 2026 will be adjusted from 25.28/29.231/34.56 billion yuan to 23.806/28.231/32.813 billion yuan, with growth rates of 6.9%/18.6%/16.2%, respectively; net profit to mother will be adjusted from 0.957/1.205/1.613 billion yuan to 0.804/1.205/1.567 billion yuan, with growth rates of 374.4%/50.0%/30.0%, respectively ; PE was 54.2/36.1/27.8, respectively. Considering Tongfu Microelectronics's accumulation of product technology in the xPU field, and the company continues to promote the development of new 5nm, 4nm, and 3nm products. With the advantages of advanced packaging technology such as FCBGA and Chiplet, it is expected that the penetration of superimposed AI/large models in various fields such as mobile phones/PC/automobiles will drive up demand for advanced packaging. Maintain a “buy-A” rating.

Risk warning: risk of industry and market fluctuations; risk of international trade friction; risk of artificial intelligence development falling short of expectations; risk of failure to industrialize new technologies, new processes, new products, and new projects as scheduled; risk of changes in the supply and price of major raw materials; risk of deviations in asset depreciation expectations; risk of dependence on major customers.