Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved revenue of 51.252 billion yuan, +19.13% year over year; realized net profit to mother of 3.903 billion yuan, +0.50% year over year; realized deducted non-net profit of 3.248 billion yuan, -7.44% year over year. Among them, Q3 achieved revenue of 16.693 billion yuan, -7.22%, and -2.46% month-on-month; realized net profit to mother of 1.051 billion yuan, -41.02% YoY, -14.21% month-on-month; realized deducted non-net profit of 0.82 billion yuan, or -52.72% YoY and -23.65% month-on-month.

Revenue grew steadily, and profitability was under short-term pressure: the company's gross margin for the first three quarters of 2024 was 21.59%, -3.23pct year on year; net margin was 7.69%, -1.41pct year on year. 24Q3 gross margin was 21.72%, -3.49 pct year on year, +0.83 pct month on month; net margin was 6.44%, -3.61 pct year on year, -0.74 pct month on month.

Profitability is under pressure in the short term, mainly affected by a combination of factors such as the competitive landscape, cost changes, and the company's price strategy. Currently, the price pressure on upstream components is gradually decreasing, and we expect Q4's gross margin to continue the month-on-month improvement trend. In terms of expenses, 24Q3 sales/management/R&D/finance expenses were 7.91%/2.77%/3.84%/1.13%, respectively, +1.04/+0.49/+0.40/+1.17pct. We think the increase in the financial expense ratio is mainly due to the fact that the Federal Reserve announced a 50 basis point cut in interest rates on September 18, '24. Fluctuations in the US dollar exchange rate caused the company's exchange losses to increase.

Demand from emerging markets is strong, and the company accelerates new market development: According to Canalys data, mobile phone shipments in Southeast Asia, Latin America and India increased 15%/10%/9% year on year respectively in 24Q3. The performance of emerging markets was far higher than the overall global market (global smartphone shipments increased 5% year on year in 24Q3), showing strong growth momentum and huge potential in the mobile phone consumer market in emerging regions. The company's sales area is mainly concentrated in emerging global market countries such as Africa, South Asia, Southeast Asia, the Middle East and Latin America. By region, the company first entered Africa. According to Canalys data, 24Q3 had a 50% share of the mobile phone market in Africa, ranking first. At this stage, the company has entered more markets outside of Africa and South Asia, including Southeast Asia, Latin America, the Middle East, Eastern Europe, etc. Compared with countries and regions where companies entered Africa, Bangladesh, Pakistan, etc., the company's market share in new markets is relatively low, and there is still plenty of room for improvement in the future. Currently, emerging market countries are still in the market development trend of “switching from feature phones to smart phones,” and switching from functional computers to smart phones is still an important factor driving the growth of the smart phone market in emerging markets. Deepening the African market is the company's long-term strategy. The company is expected to continue to maintain its competitive advantage in Africa, increase the speed and success rate of the company's brand development in new markets, and ensure a steady increase in the share of key countries in the new market.

The AI layout continues to deepen, focusing on AI innovation on the mobile phone end: AI is the general trend for mobile phone manufacturers, and the company's AI efforts will enhance product competitiveness and user experience. In the field of AI, in March '24, the company's brand TECNO announced the launch of TECNO AIOS at MWC 2024. Since September, the company's brands have released a variety of mobile phones equipped with AI functions, including the PHANTOM V Fold2 5G, the second-generation folding screen flagship in the PHANTOM series. The product is equipped with a new TECNO AI, with a series of AI functions including real-time call translation, AI wallpaper, AI image cancellation, AI cutout, and recording to notes. In September of this year, the artificial intelligence joint laboratory jointly built by Communication Holdings and MediaTek was officially unveiled in Shenzhen. The two sides will integrate superior technical resources in the field of artificial intelligence, focus on mobile application innovation in large-scale language models, agent agents, AI voice, video, etc., provide more generative Al end-side deployment and optimization solutions, and jointly explore AI smart services and mobile application scenarios for the public.

Maintaining a “buy” rating: We are optimistic that the company will stabilize its competitive advantage in Africa; continue to expand emerging global markets such as South Asia, Southeast Asia, the Middle East, and Latin America, and the market share is expected to continue to increase. At the same time, the company actively embraces AIGC to open up room for long-term growth. The company's net profit for 2024-2026 is estimated to be 5.438 billion yuan, 6.515 billion yuan, 7.746 billion yuan, EPS is 4.77 yuan, 5.71 yuan, 6.79 yuan, and PE is 19X, 15X, and 13X respectively.

Risk warning: Emerging market development falls short of expectations, risk of fluctuations in raw material prices, risk of market competition, impact of exchange rate fluctuations