Incidents. The company released results for the first three quarters of 24, the company released three quarterly reports. Q1-3 achieved revenue of 4.71 billion yuan (YoY +32.69%), net profit of 0.862 billion yuan (YoY +96.77%), deducted non-net profit of 0.831 billion yuan (YoY +127.36%); a single Q3 achieved revenue of 2.055 billion yuan (+21.19%, month-on-month +56.91%), net profit to mother of 0.435 billion yuan (YoY + 66.99%, +75.30% month-on-month), deducted non-net profit of 0.44 billion yuan (YoY +72.60%, +98.53% month-on-month).

Q3 Significant increase in gross margin, improvement in management costs and R&D expenses. In terms of gross margin, the company's gross profit margin in Q3 was 36.71%, +8.14pcts year on year. The main reasons for the increase in gross margin include: 1) increased operating rate due to increased shipments of microprisms, thin film optical panels, and filters; 2) significant increase in gross margin due to changes in new product release and product structure; 3) cost reduction and efficiency are progressing smoothly. In terms of cost ratios, the company's single Q3 sales expense rate/management expense rate/R&D expense ratio/financial expense ratio were flat year-on-year, and -0.9pcts/-0.12pct/+0.66pcts, respectively. We expect the decline in management expenses and R&D expenses to mainly benefit from cost reduction and efficiency, and the reduction in R&D expenses after mass production of Microprism. The increase in financial expenses is expected to be affected by increased exchange losses.

By deepening cooperation with major North American customers, AI is expected to drive optical upgrades. The company has a comprehensive layout around major customers in North America: 1) in terms of coated filter products, the company has received direct cooperation opportunities with major customers to achieve supply chain breakthroughs; 2) the decline in quadruple reflective prism models in 24 years is expected to continue to provide performance support; 3) thin film optical panels will maintain steady growth through cost reduction and efficiency; 4) Benefiting from AI intelligent sensing, optical upgrades can be expected.

Mass production of strategic card position AR glasses and reflective waveguides is expected to break through. AR glasses are expected to become the best carrier for AI. Major overseas companies such as Meta have accelerated deployment. The company has technical layout for solutions such as diffractive light waveguides, reflected light waveguides, and Birdbath. Among them, in the field of reflected light waveguides, the company has large-scale mass production and manufacturing capabilities, which is expected to break through the problem of mass production of reflected light waveguides.

Profit forecast. We expect the company's 2024-2026 operating income to be 6.23 billion yuan/8.023 billion yuan/9.367 billion yuan, respectively, and the net profit due to mother for 2024-2026 will be 1.004/1.334/1.642 billion yuan, respectively. The corresponding EPS will be 0.72/0.96/1.18 yuan/share, respectively. Considering comparable company valuation levels, the 25-year PE valuation range is 25-30x, corresponding to a reasonable value range of 24.00- 28.80 yuan, maintaining the “superior to the market” rating.

Risk warning. Risk of fluctuations in downstream demand; risk of AR R&D falling short of expectations.