Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved revenue of 44.007 billion yuan, +2.21% year over year; realized net profit of 1.297 billion yuan, -6.86% year over year; realized deducted non-net profit of 1.054 billion yuan, or -17.28% year over year. Among them, Q3 achieved revenue of 16.621 billion yuan in a single quarter, +2.65% year over month; realized net profit of 0.513 billion yuan, -18.03% year on year, +13.97% month on month; realized deducted non-net profit of 0.453 billion yuan, -22.07% year on year and +43.58% month on month.

Q3 revenue grew steadily, and the profit side was under year-on-year pressure: 24Q3's revenue remained flat. By product, 24Q3 consumer electronics/communications/industrial/cloud and storage/automotive electronics/medical revenue was 59.3/56.8/17.5/1.49/0.08 billion yuan, respectively, -0.4%/+3.2%/-9.2%/+16.3%/+17.6%/-20.8%. Among them: 1) the year-on-year increase in market demand for cloud and storage products benefited from the rapid development of new technology applications; 2) automotive electronics products mainly benefited from the year-on-year increase in the contribution of integration into Hirschman's business; 3) industrial products were affected by the global economy and the slowdown in corporate investment, but revenue recovered in the third quarter, and the year-on-year decline narrowed compared to the third quarter. The company's gross margin for the first three quarters of 2024 was 9.81%, +0.08pct year on year; net margin was 2.95%, -0.28pct year on year. 24Q3 gross profit margin 9.76%, -0.53 pct year on month, -0.36 pct month on month; net profit margin 3.15%, -0.71 pct year on year, -0.04 pct month on month. The decline in profitability in Q3 was mainly due to: 1) the company expanded production by 30%, which led to an increase in depreciation expenses; 2) the current merger of Hirschman Auto Communications caused an increase in the expense ratio during the period. 3) The quarterly profit of individual business units declined significantly from month to month. Expense side: Sales/management/R&D/finance expenses for the first three quarters of 2024 were 0.85%/2.28%/3.21%/0.77%, respectively, +0.26/+0.25/+0.24/+0.51 pct. According to the company's guidelines, due to the slowdown in demand in the downstream market compared to the original forecast, the company expects Q4 revenue to be -5% month-on-month. The Q4 operating profit margin is affected by declining operating income and higher operating costs, and is expected to decrease by about 1 pct month-on-month.

I am optimistic that the volume and price of AI-driven SIPs will rise, and card communication modules will benefit from the introduction of Wi-Fi self-developed chips by major customers:

The application of AI in mobile phones will drive changes in hardware design architectures such as CPU, NPU, and storage. SiP is expected to add new material numbers during the device integration process. Combined with the batch launch of AI functions from major customers, it is expected to boost mobile phone shipments. We are optimistic that the volume and price of the company's SiP products will rise sharply. With the application and technological upgrading of AI models in mobile phones and wearable products, SiP will have more application opportunities in the future. Looking ahead to next year, major customers plan to fully introduce self-developed chips in Wi-Fi products. As the company's main partner for major customer communication modules, the company has a good card position, and it is expected that its market share will increase. In addition, the company is cooperating with other North American mobile phone manufacturers on Wi-Fi modules and is actively promoting the introduction of SiP designs by other downstream brand customers.

The AI wave boosts the rapid growth of the cloud business, expands the mainland market and deepens the automotive electronics layout: 1) Cloud storage: Benefiting from the surge in market demand brought about by the AI wave, the company's cloud and storage business is expected to become the best-performing business segment throughout 2024. The company's cloud and computing products include ServerCompetent, AI Card, PR, etc., with Server Promises's revenue growing by more than 50% in the first three quarters of 2024. In order to meet the customer's complete server assembly needs, the company decided to extend from ServerPCBA to L10 system assembly to accelerate growth and expand market share. 2) Automotive electronics:

The company's automotive electronics products include Power Train, Power Module, Car Antennas, etc. Currently, the growth point of the global automotive electronics market is mainly concentrated in the electric vehicle sector in mainland China. Overseas customer manufacturers are undergoing large-scale integration, causing demand to slow down, and the growth rate is lower than expected. In order to cope with market changes, the company stepped up its business expansion efforts in the mainland market, including expanding the Power Train domestic sales team and investing in a new production line at the Huizhou plant to produce Power Modules to obtain orders from domestic automobile customers and develop the domestic supply chain.

Maintaining a “buy” rating: We are optimistic that the company is a leading domestic SiP company. The SiP business is expected to benefit from the AI wave and the increase in value brought by major customers introducing self-developed WiFi chips next year. The cloud storage business continues to benefit from increased demand for AI servers and switches and has entered a performance repair channel. The automotive electronics business has been in depth for many years. PowerTrain & PowerModule has driven rapid future growth. The acquisition of Hessman is expected to take advantage of the company's original in-vehicle wireless communication business. It is estimated that the company's net profit from 2024 to 2026 will be 1.64 billion yuan, 2.2 billion yuan, and 2.765 billion yuan, EPS will be 0.75 yuan, 1.01 yuan, 1.26 yuan, and PE for 24-26 will be 21X, 15X, and 12X respectively.

Risk warning: Downstream demand falls short of expectations, shipments from major customers fall short of expectations, risk of high customer concentration, risk of exchange rate fluctuations.