Incident: The company released its three-quarter report for 2024. In the first three quarters of 2024, the company achieved revenue of 0.988 billion yuan, or -35.15%; realized net profit to mother of -0.122 billion yuan, which turned a year-on-year loss; deducted non-net profit of -0.193 billion yuan, turning a year-on-year loss. Among them, in Q3 2024, the company achieved revenue of 0.372 billion yuan, -15.54%, and +20.80% month-on-month; realized net profit to mother of -0.107 billion yuan, turning losses year on year, increasing losses from month to month; and realized deducted non-net profit of -0.119 billion yuan, turning losses year on year and increasing losses from month to month.

Market changes affect performance and actively promote product structure transformation and upgrading: In the first three quarters of 2024, due to market changes, prices of some products fell and demand declined, and the company's revenue showed a downward trend. In terms of profitability, in the first three quarters of 2024, the company's gross margin was 14.92%, -19.55pcts; the net margin was -14.03%, or -36.11pcts year-on-year. The main reason for the decline in profitability was the decline in market prices and demand for some of the company's products and a sharp increase in the company's R&D investment. In terms of expenses, the company's sales/management/R&D/finance expenses rates for the first three quarters of 2024 were 2.89%/13.90%/23.55%/-5.12%, respectively, and the year-on-year changes were +1.28/+5.09/+11.95/+1.26pcts. The main reason for the significant year-on-year increase in R&D costs and absolute value was mainly due to the company's continuous improvement of overall competitiveness, actively adjusting the existing production line product structure, promoting product structure transformation and upgrading, and continuing to increase R&D investment, actively developing new products and new process platforms, from the traditional consumer market to new energy and industry Transfer to new fields such as automobiles.

Increase capital to improve production line layout and advance the company's chip manufacturing process to a higher process node: The company announced on November 15 that it plans to increase capital by 4 billion yuan to its wholly-owned subsidiary Yandong Technology. After the capital increase, Yandongwei will hold 100% of Yandong Technology's shares; Yandong Technology plans to increase capital by 4.99 billion yuan to use in Nortel's integrated investment and construction of a 12-inch integrated circuit production line project. The total investment of the project is 33 billion yuan. The main products planned for the project are display driver chips, digital-analog hybrid chips, and embedded MCU chips As well as high-speed hybrid circuit chips and special application chips based on PD/FD-SOI process technology, the project started in 2024, equipment was moved in the fourth quarter of 2025, mass production was achieved by the end of 2026, and production was completed in 2030. Yandong Technology, a wholly-owned subsidiary of Yandongwei, invests in Nortel integration and controls Nortel integration through a concerted operator agreement, which helps the company build characteristic process platforms such as 28nm-55nm HV/MS/RF-CMOS, PD/FD-SOI, and build a 12-inch production line with a planned production capacity of 0.05 million pieces/month to achieve the evolution of technology from 65nm to 40nm/28nm. The company's current production lines are mainly 65nm and above. Through the construction of this project, the company will achieve a better industrial layout of wafer production lines, push process technology capabilities to higher process nodes, effectively enhance the company's core competitiveness, and help achieve high quality and sustainable development.

Optimistic that products will meet market demand, and are expected to benefit from the production capacity gap to recover performance: the global semiconductor market returned to a growth trajectory in 2024. According to the American Semiconductor Industry Association (SIA) data, the global semiconductor market continued to grow in the third quarter of 2024. Global semiconductor sales in the third quarter were 166 billion US dollars, up 23.2% year on year and 10.7% month on month. As fields such as smartphones, electric vehicles, and the Industrial Internet of Things rapidly develop, China's semiconductor market is picking up strongly. The localization rate of the domestic integrated circuit market is steadily increasing. The localization rate of China's integrated circuit market was 16.7% in 2021, and is expected to rise to 21.2% by 2026. It is expected that by 2027, the supply and demand gap for mature manufacturing processes at 28 nm and above in China will increase to about 0.37 million pieces/month, and the market space is large. The product plan and target customers of the Nortel Integrated Project are clear. The display driver IC, digital-analog hybrid chip, MCU and other markets all have broad application scenarios. Currently, Nortel Integrated has signed cooperation intentions with many partners. The Nortel integrated project invested by the company is located in Beijing. It is one of the important carriers of the national integrated circuit development strategy. The integrated circuit industry has strong comprehensive strength. It has an enterprise layout in the integrated circuit design industry, manufacturing industry, sealing and testing industry, equipment industry, materials industry, etc., covering a comprehensive range of industrial chain links, but it is relatively concentrated on the design side, and there are relatively few companies on the manufacturing side and testing side. The company is expected to benefit from the manufacturing side capacity gap and achieve performance recovery.

Upgraded to “buy” rating: We believe that in the future, with the steady recovery of the consumer electronics market and the rapid recovery of the NEV market, the company's performance is expected to recover steadily; after the company invests in a 12-inch wafer production line and reaches production, it is expected to create a new performance growth point for the company. Considering the impact of market changes on the price and demand of the company's products, and in line with the company's performance in the first three quarters of 2024, the company's profit forecast was lowered, but at the same time, considering that the company increased capital and Nortel integrated to promote the company's chip process upgrade, production capacity is expected to greatly benefit from the local production capacity gap and achieve long-term performance growth after delivery, so it was raised to a “buy” rating.

The company's net profit for 2024-2026 is estimated to be -0.18 billion yuan, 0.015 billion yuan, and 0.17 billion yuan, respectively; EPS in 2025-2026 will be 0.01 and 0.14 yuan, respectively; PE will be 2017X and 177X, respectively.

Risk warning: Industry competition increases risks, downstream demand falls short of expectations, production capacity construction falls short of expectations, and the risk of failure to integrate the acquisition of NORTH Power.