Incident: The company released its three-quarter report for 2024. In the first three quarters of 2024, the company achieved revenue of 8.163 billion yuan, +18.32% year over year; realized net profit of 0.029 billion yuan, reversing losses year on year; deducted non-net profit of 0.14 billion yuan, or -23.76% year on year. Among them, in Q3 2024, the company achieved revenue of 2.889 billion yuan, +19.22%, and +2.87% month-on-month; realized net profit of 0.054 billion yuan, reversing losses year-on-year and month-on-month; and realized deducted non-net profit of 0.014 billion yuan, or -34.21% year-on-year, reversing losses month-on-month.

Revenue continues to grow steadily, and we expect a recovery in product prices to improve profitability: in the first three quarters of 2024, the company's shipments of various products increased, and revenue achieved steady growth. In terms of profitability, in the first three quarters of 24, the company's gross margin was 19.28%, -4.10pcts year on year; net margin was -1.23%, +1.50pcts year over year. The decline in gross margin was mainly due to increased market competition and falling prices of the company's products in various categories.

In terms of expenses, the company's annual sales/management/R&D/finance expense ratios for the first three quarters of 24 were 1.57%/4.46%/9.25%/1.95%, respectively. The year-on-year changes were -0.16/+0.56/+0.78/ -0.63pcts, respectively, and the cost level was well controlled.

Continue to improve the automotive-grade high-end power semiconductor layout, and expect the release of production capacity from multiple production lines to improve performance: In recent years, the company has vigorously developed the third-generation semiconductor industry, which mainly focuses on compound products such as SiC and GaN.

At the beginning of 2024, the company started the construction of an 8-inch GaN power device chip mass production line at its Hangzhou base. As of November 15, the company's GaN chip production line had been initially completed, aiming to launch the first batch of automotive-grade and industrial-grade GaN power device products as soon as possible. In order to further improve the company's strategic layout in the field of automotive-grade high-end power semiconductors, the company signed a “Strategic Cooperation Framework Agreement” with the Xiamen Municipal People's Government and the Xiamen Haicang District People's Government on May 21, 2024: All parties cooperated to build an 8-inch SiC power device chip manufacturing line with SiC MOSFET as the main product in Haicang District of Xiamen City. The project is being built in two phases. The first phase of the project has an investment scale of 7 billion yuan, with a planned production capacity of 0.035 million pieces/month; the second phase has an investment scale of about 5 billion yuan, with a planned production capacity of 0.025 million pieces/month. After the completion of the second phase of construction, it will have a monthly production capacity of 0.06 million 8-inch SiC power device chips. Currently, the company's 8-inch SiC chip production line is being built at an accelerated pace, and it is expected to be initially completed by the end of 2025.

Seize domestic chip substitution opportunities and further expand production capacity to respond to market demand: against the backdrop of continued support from national policies, rapid development of downstream electric vehicles, new energy, computing power and communications industries, and a marked acceleration of the domestic chip substitution process. In order to seize market development opportunities, the company has arranged an expansion of production capacity for power device chips such as 12-inch analog circuits and IGBTs, and an expansion of production capacity for IPM power module packaging and testing production lines. It is expected that in 2025, the company's IPM product shipments will continue to grow by more than 30%, continue to increase its market share in the fields of white electronics, industry, automobiles, etc., and promote further improvement in the company's business performance. In the third quarter of 2024, the company's 8-inch and 12-inch IGBT chip production capacity was close to full capacity. The company has arranged technical reform funds to further increase IGBT chip production capacity. It is expected that the market share of IGBT products in the automotive and new energy markets will increase dramatically in 2025. Furthermore, the company's development of SiC MOSFET chips iterated to the IV generation is about to be verified, and batch delivery is expected in 2025. The company will further increase investment in technological transformation of SiC chip production lines, speed up product technology iteration, and further increase market share.

Maintaining the “increase” rating: The company's production capacity continues to be fully loaded. We are optimistic that shipments of the company's products will continue to increase in high-threshold markets such as automobiles, new energy, industry, communications, and large-scale white electricity. Combined with the company's further expansion of production line production capacity, the company's scale effect is expected to continue to show in the future, further promoting the company's performance recovery. Considering the short-term fluctuation and decline in the company's product prices, there is a certain impact on the company's gross margin. Combined with the company's profit performance for the first three quarters of 2024, we lowered the company's profit forecast. We expect the company's net profit to mother for 2024-2026 to be 0.08/0.47/0.714 billion yuan, corresponding EPS is 0.05/0.28/0.43 yuan, and the corresponding PE is 590/100/66 times.

Risk warning: capacity expansion falls short of expectations; customer development progress falls short of expectations; product development falls short of expectations; downstream demand falls short of expectations.