Revenue for the first three quarters increased 42.17% year over year, and net profit to mother increased 188.08% year over year. The company released its report for the third quarter of 2024, achieving revenue of 1.46 billion yuan (YoY +42.17%) and net profit of 0.251 billion yuan (YoY +188.08%) in the first three quarters. Among them, the third quarter achieved revenue of 0.54 billion yuan (YoY +49.96%, QoQ +1.27%) and net profit of 0.099 billion yuan (YoY +340.17%, QoQ +1.79%). Revenue growth is mainly due to smart homes and consumer electronics, and the growth rate in this sector is expected to be 30-35% this year. The Internet of Things penetration rate has further increased in other fields, and the company's business in the fields of energy management, tools and equipment, and health has all shown high growth.

The net interest rate level remained stable, and overseas revenue increased month-on-month. In the first three quarters, the company's comprehensive gross margin reached 42.81%, and the net margin reached 17.25%; chip gross margin was about 50.1%, and module gross margin was about 38%. Among them, the consolidated gross margin for the third quarter of the single quarter was 42.14% (QoQ-1.97pp), and the net margin was 18.37% (QoQ -0.17%). The company's product pricing and costs remained stable in the third quarter. Fluctuations in gross margin were mainly due to structural changes in customer sales, and the company's gross profit basically maintained the target of 40% or more. By region, overseas demand continued to be strong, and domestic sales picked up slightly. Direct overseas sales increased 25.99% month-on-month in the third quarter, and direct domestic sales decreased 6.7% month-on-month (in the second quarter, overseas +21.13%, domestic +44% month-on-month).

The next new product promoted a high increase in performance, and the M5Stack merger and acquisition collaborated for development. After nearly two years of introduction and promotion, the company's next new products, such as ESP32-S3, C2, and C3, have obtained approval and orders from end customers, driving the company's performance to maintain a high speed. In terms of ecology, by the end of the third quarter, the cumulative number of GitHub open source projects exceeded 0.12 million, product books were added in Czech, and the global influence continued to grow. In the first half of the year, the company acquired 57.1% of M5Stack Information Technology's shares, extending the module and development kit downward, which has a synergy effect with the original chip business. It is expected to further expand new industrial application scenarios in the future. On the retail side, revenue contribution accounts for about 5%, and subsequent M5Stack is also expected to further enhance the influence of the ESP brand on the retail side.

Investment advice: Maintain an “better than the market” rating. We are optimistic about the company's competitiveness and leading edge in the WiFi MCU field. With the gradual maturity of the P series in the future, the company is expected to further develop new applications in the SoC field. At the same time, the growth of the global developer community will further enhance the influence of the company's products.

We expect the company's 2024-2026 revenue to be 2.084/2.552/3.126 billion yuan (previous value 1.777/2.242/2.841 billion yuan) and net profit to mother 0.347/0.432/0.514 billion yuan (previous value 0.189/0.277/0.398 billion yuan). The PE corresponding to the current stock price is 42.5/34.1/28.7 times, respectively, maintaining the “better than the market” rating.

Risk warning: industry competition increases risk; risk of rising raw material procurement prices; risk of product development progress falling short of expectations; risk of exchange rate fluctuations, etc.