Key points of investment:

Event: Zhongshi Technology released its 2024 three-quarter report: 24Q1-Q3 achieved revenue of 1.096 billion yuan (YoY +14.80%), net profit of 0.132 billion yuan (YoY +143.03%), net profit of 97.56 million yuan (YoY +140.11%), gross profit margin 30.76% (YoY +6.35pct), net profit margin of 12.05% (YoY +6.36pct); 24Q3 achieved revenue of 0.452 billion yuan (YoY +45.19%, month-on-month +31.12%), net profit of 69.37 million yuan (YoY +252.49%, month-on-month +112.20%), net profit net profit of 53.02 million yuan (YoY +399.14%, month-on-month +98.96%), gross profit margin of 33.02% (+5.27pct YoY, +4.96pct month-on-month), net profit margin 15.35% (YoY +9.03pct, month-on-month +5.87pct).

Leading cooling solution to help iterate AI computing power end side technology. Under the development wave of generative AI, demand for AI computing power has exploded, and AI hardware devices have brought higher performance requirements for integrated distributed solutions, which in turn has spawned a larger cooling application market. According to the company's official website, as a mainstream enterprise in the domestic cooling industry, the company closely follows the development of AI technology, continues to increase R&D investment in high-performance cooling technology, and fully participates in the entire process of customers' new products from early design to final mass production and delivery, and provides customers with customized and systematic cooling solutions. The company's cooling solutions, core materials, and devices can be applied to the four major segments of AI computing power: 1) In the field of AI terminals, the cooling combination of heat dissipation plate (VC) +graphite has now become the cooling solution for major brands. The company maintains a leading position in the field of synthetic graphite, while deepening VC copper foam technology, building core technical barriers, and actively promoting the introduction of high-end VC products by major customers. 2) In the field of AI computing power centers, the cooling solutions for 800G and 1.6T high-speed optical modules are gradually changing from heat-conducting materials to VC modules. The company's VC products have now been certified and mass-produced by leading domestic and foreign optical communication companies, and the technical solutions have been introduced into the next generation of 1.6T optical modules.

In the server field, the company's products such as TIM materials and thermal module core components have directly or indirectly entered the industrial chain of leading domestic and foreign server manufacturers. 3) In the field of smart cars, the company's cooling solutions can be applied to smart car three-electric systems, autonomous driving, smart cockpits, charging equipment, flying cars, etc.

At present, the company has obtained supplier codes from the world's top 3 auto parts companies and important customers such as BAIC, BYD, and Xiaopeng, and some projects have been targeted for development and batch delivery. 4) In the field of medical equipment, the company cooperated with well-known international companies to complete a large number of thermal design solutions to provide them with products such as liquid cooling modules and TIM materials.

Profit forecast: We expect the company's revenue for 2024-2026 to be 1.568 billion yuan, 2.025 billion yuan, 2.518 billion yuan, and net profit to mother 0.169 billion yuan, 0.26 billion yuan, 0.35 billion yuan, EPS 0.57 yuan, 0.87 yuan, and 1.17 yuan, respectively. Referring to the company's historical valuation and the average valuation level of comparable companies, the company was given a dynamic PE range of 35-40X in 2025, corresponding to a reasonable value range of 30.40-34.74 yuan, which is “superior to the market” rating.

Risk warning: AI demand falls short of expectations, product upgrade iterations fall short of expectations, risk of exchange rate fluctuations.