Incident: The company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved revenue of 11.855 billion yuan, a year-on-year increase of 16.73%; realized net profit to mother of 0.247 billion yuan, an increase of 43.21% year on year; realized deducted non-net profit of -0.351 billion yuan, an increase of 55.25% year on year. In 2024, Q3 achieved revenue of 4.175 billion yuan, up 13.27% year on year and 1.29% month on month; realized net profit to mother of 0.063 billion yuan, a sharp increase of 4.09% year on month; deducted non-net profit of -0.063 billion yuan, up 72.70% year on year and 75.48% month on month.

Product structure optimization+cost reduction and efficiency, 24Q3 net profit increased sharply year on year: in the third quarter of 2024, the company's net profit increased sharply year on year, mainly due to: the company's share of high-end LED products increased further, LED business revenue scale and profitability increased year on year; the scale of integrated circuit business such as RF front-end and power electronics continued to grow. The company's gross margin in Q3 '24 was 10.31%, +2.20pcts year on year, +1.32pcts month on month; net margin was 1.51%, +1.44pcts year on year, -0.08pcts month on month. In terms of expenses, Q3 company sales, management, R&D, and financial expenses rates were 1.35%/5.25%/4.01%/1.06%, respectively, with year-on-year changes of +0.10/-0.87/-1.01/-1.05 pcts, respectively. The company actively improves the efficiency and quality of management, effectively driving the year-on-year decline in various cost rates.

Benefiting from the increase in LED demand, product segmentation progressed in an orderly manner: In the first half of 2024, the company's LED epitaxial chip business revenue increased 13.61% year on year. Among them, traditional LED epitaxial chip products increased 14.60% year on year, and high-end LED epitaxial chip products increased 10.48% year on year. Economic recovery has begun to re-drive steady growth in demand for traditional LEDs, and the product restructuring of the company's LED business continues to advance. The gross margin of the company's LED business increased by nearly 5 percentage points over the same period last year. The company's MiniLED has been used in the fields of televisions, displays, laptops, in-vehicle displays, VR, etc., and sales volume continued to grow in the first half of the year; Micro LED technology has significant advantages and cooperated with major domestic and foreign manufacturers. Currently, production capacity continues to expand, MiP product yield is steadily increasing, and new smaller products have been introduced into mass production. The products have been recognized by domestic and foreign customers; automotive LED technology has caught up with the international first-tier level, and has obtained stable orders from leading international and domestic car companies, and the development momentum is good; plant lighting product technology continues to break through UV series products lead in performance and continue to increase product market share in segmented fields; lasers have begun mass production and shipment, and continue to expand high-end application markets such as laser projection and laser cutting; high-power inverted products give full play to technological leadership, continuously expand applications and domestic and foreign customer bases, and shipments are growing rapidly.

The integrated circuit business continued to advance, and the market share further increased: the main business revenue of the company's integrated circuit business increased 16.85% year-on-year in the first half of 2024. In terms of RF front-end, as of the first half of 2024, the company already had a gallium arsenide RF foundry production capacity of 0.015 million pieces/month. Benefiting from the recovery in terminal market demand and the penetration of highly integrated RF front-end solutions, the company's share in major major customers has gradually increased. At the same time, the company's current filter production capacity is 150 KK/month. With the introduction of new products into the production line, shipments have increased significantly compared to the same period last year. In terms of power electronics, Hunan San'an already has a silicon carbide supporting production capacity of 16,000 pieces/month and silicon-based gallium nitride production capacity of 2,000 pieces/month. The first phase production line of Suzhou Scott Semiconductor, a joint venture founded by Hunan San'an and Ideal Auto, has been completed. The C-sample full-bridge power module has been delivered. Product verification is expected to be completed in the second half of this year, and mass production of modules is expected in 2025.

In terms of optical technology, the company has a production capacity of 2,750 pieces/month for optical technology products. In the first half of 2024, the company continued to increase shipments of GPON and XGPON products in the access network field, and its market share continued to increase. It has basically achieved industry coverage and actively deployed next-generation 50G PON applications. The company will continue to penetrate into the application fields of cutting-edge technology in the market, increase its market share of products, and bring continuous momentum to the company's development.

Maintaining the “gain” rating: Benefiting from economic recovery and market recovery, the company's LED business and integrated circuit business demand have rebounded to a certain extent; at the same time, the company's product structure has been optimized, the share of high-end products has increased, and gross margin has gradually improved. As the company's domestic and foreign market expansion continues to advance and the market share of the company's products further increases, the company's sales scale and profitability are expected to improve significantly. The company's net profit for 2024-2026 is estimated to be 1.176 billion yuan, 1.897 billion yuan, and 2.746 billion yuan, respectively. The corresponding EPS is 0.24 yuan, 0.38 yuan, and 0.55 yuan, respectively, and the corresponding PE is 58X, 36X, and 25X, respectively.

Risk warning: Product demand falls short of expectations, production line construction risks, technological innovation risks, market competition risks.