Ziguang Guowei released its three-quarter report: Q3 achieved revenue of 1.39 billion yuan (yoy -27.25%, qoq -19.75%) and net profit of 0.272 billion yuan (yoy -57.30%, qoq -36.77%). Q1-Q3 2024 achieved revenue of 4.263 billion yuan (yoy -24.56%), net profit of 1.01 billion yuan (yoy -50.27%), deducting non-net profit of 0.878 billion yuan (yoy -54.30%). Due to insufficient market demand in special industries combined with price cuts for some products, the company's performance declined significantly. However, considering that the military industry has strong plans for equipment construction in the 14th Five-Year Plan, industry demand and orders are expected to reach an inflection point. The company's performance may have a lot of room for improvement next year, so we maintain a “buy” rating.

Gross profit margin continues to decline, and the company has taken many measures to hedge against price pressure

The company's gross margin for the first three quarters was 56.81%, down 7.01pct from the same period last year. It was mainly due to a decline in the share of revenue from high-margin specialty businesses, while prices for some specialty products were reduced. At present, the company has solved some of the price pressure through measures such as independent industrial chain construction and upstream and downstream cooperation. We believe that in the future, the company is expected to further ease price pressure and maintain the stability of the company's gross margin through measures such as increasing scale effects and strengthening supply chain control.

Self-built packaging lines enabled Shenzhen Guowei, and the competitiveness of the special business continued to improve. On June 12, Sun Company Ziguang Electric's high-reliability chip packaging test project production line was launched. The production line mainly supports Shenzhen Guowei's special business. We believe that the company's self-built packaging line is beneficial to cost control, guarantee the level of gross margin, and at the same time have greater controllability in product quality assurance; in addition, it can provide a stronger guarantee for the company's product supply channels and supply speed. The completion of this packaging line will significantly enhance the company's core competitiveness and help the company return to a high growth trajectory when industry demand and orders recover.

New products continue to break through, and the product matrix continues to improve

In the first three quarters of this year, the company made breakthroughs in product research and development, industrial chain expansion in special industries, and layout in the field of automotive electronics. Special memory has completed more than ten series of R&D work. Newly developed new special memories, switching chips, etc. have all been supplied one after another; image AI smart chips and digital signal processor DSPs have been developed and selected by users; and a large number of new products have been developed in the field of analog products. The continuous improvement of the product system will benefit the company's medium- to long-term healthy development.

Profit forecasting and valuation

We predict that the company's net profit for 24-26 will be 1.436/2.111/2.835 billion yuan (previous value 2.478/2.968/3.549 billion yuan). The reason for the reduction was due to fluctuations in industry demand and price reductions for some products. The corresponding EPS was 1.69/2.48/3.34 yuan. Comparable to the company's 25-year iFind's consensus forecast is 28 times. Considering the continuous improvement of the company's product system, the layout in the civil sector will open up room for the company's long-term growth, giving the company 32 times PE valuation in 25 years, and the corresponding target price is 79.36 yuan (previous value was 61.32 yuan, corresponding to 21 times PE in 24 years).

Risk warning: Risk of orders falling short of expectations, risk of falling product prices.