Huaqin Technology released its report for the third quarter of 2024: in the first three quarters of 2024, the company achieved operating income of 76.01 billion yuan, a year-on-year increase of 17.15%; realized net profit due to mother of 2.05 billion yuan, an increase of 3.31% year on year; realized net profit without return to mother of 1.694 billion yuan, an increase of 2.50% year on year.

Key investment points

24Q3 revenue increased significantly, and profitability was temporarily disrupted by revenue restructuring

2024Q3 achieved operating income of 36.612 billion yuan, up 45.36% year on year and 58.03% month on month; net profit to mother of 0.759 billion yuan, up 8.04% year on year, up 10.63% month on month; net profit without return to mother of 0.674 billion yuan, down 2.05% year on year and 37.53% month on month. In terms of profitability, in Q3 2024, the company achieved a gross sales margin of 7.63%, a year-on-month decrease of 2.65pct; achieved a net sales margin of 2.06%, a decrease of 0.89pct over the previous month. The main reasons for the decline in the company's gross margin are:

1) The gross margin of smartphone products declined; 2) Revenue restructuring led to an increase in data center business revenue. Due to the high cost of the AI server GPU board, the overall gross margin of the business was low.

Build a “2+N+3” product strategy layout, and create a new growth curve for AIoT and automotive electronics businesses

By building a “2+N+3” product strategy layout, the company is actively expanding its automotive electronics, data center, and AIoT businesses with smartphones and laptops as the foundation.

The company is a leader in the mobile phone ODM industry and the fourth largest laptop ODM in the world. In the automotive electronics business, the company has made full use of its R&D and design capabilities for the Arm architecture. It has now completed the layout of four major product lines: smart cockpit, intelligent vehicle control, intelligent connectivity, and intelligent driving, and has successfully introduced smart cockpit and vehicle networking projects in many OEMs. In terms of data center business, the company can provide full-stack R&D and delivery capabilities for hardware products such as AI servers, general-purpose servers, storage servers, switches and boards. In 2024, data center business revenue is expected to double from 2023. In terms of AIoT business, the company's products mainly include smart homes, smart speakers, IP cameras, and gaming handsets, and the AIoT business is expected to maintain rapid growth. In the first three quarters of 2024, AIoT business segment revenue increased 241% year over year. Looking ahead, the data center business and AIoT business are expected to bring incremental revenue to the company.

It is proposed to acquire Eluda to reinforce its audio business and expand customer channels in North America through collaborative development

Recently, the company announced that it intends to acquire 80% of the shares of Eluda Enterprise Holdings Limited held by Eluda Technology International Limited through a wholly-owned overseas subsidiary, Haiqin Communications Hong Kong Co., Ltd. at a cash consideration of HK$2.85 billion. Currently, the merger and acquisition is progressing smoothly, and delivery is in progress. The main purpose of this merger and acquisition is to complement the two parties' businesses. After the delivery is completed, Eluda will focus on audio products and hold the resources of major North American customers to reinforce Huaqin Technology in the smart hardware business field. At the same time, Huaqin will provide Eluta platform resources, as well as cost reduction and efficiency brought about by automation, digitalization, and internationalization. Looking forward to the future, the two sides are expected to develop collaboratively, and the company's smart terminal business revenue is expected to increase further.

Profit forecasting

We predict that the company's revenue for 2024-2026 will be 12.048, 119.284, 136.174 billion yuan, and EPS will be 2.88, 3.36, and 3.94 yuan, respectively. The current stock price corresponds to PE of 21, 18, and 15 times, respectively. As the “2+N+3” product strategy continues to advance, the company is expected to achieve new performance increases through the data center and AIoT business while maintaining steady growth in traditional business. Furthermore, the company actively mergers and acquisitions, deepens the moat in the smart terminal business field, and maintains a “buy” investment rating.

Risk warning

AIoT business progress falls short of expectations; major North American customers fall short of expectations; demand in the downstream consumer electronics sector falls short of expectations.